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The Big Lie of Bitcoin

Bitcoin supply is not limited, because traders can always create another currency.

   

The big lie of Bitcoin is that it is a self-governing monetary system with a limited money supply. In fact, Bitcoin is what happens when people who don’t believe in government try to set one up.

The Big Lie of Bitcoin
Source: Shutterstock

Bitcoin is based on an open source software system called blockchain. Open source software isn’t actually free, though. It is free to use, but is based on a social contract that its users will support it, donate improvements, and stamp out bugs.

Bitcoin Has Competition

A blockchain is self-governing, but the software must constantly evolve to remain relevant, or something will come along to replace it. That is precisely what has just happened. Ethereum, whose software scales better, supporting more simultaneous transactions, has been replacing Bitcoin and gaining institutional support. Ethereum’s “value” is what people will pay for one token, and it’s up 20 times this year, while the price of Bitcoin has merely doubled.

Bitcoin is trying to fix this with new technology. SegWit2X is designed to correct the scaling problem, but not every trading platform supports it. Failure by any exchange to support the new software would create a “hard fork,” something that is common in open source and occurs when users find software managers aren’t meeting their needs so they create a new version of the project.

In Bitcoin, however, a hard fork would mean two incompatible forms of Bitcoin.

This has happened before. There are two forms of Ethereum, dubbed ETH and ETC. Owners had to choose which to support last year. Those who chose ETC now have coins worth $15. Those who chose Ethereum have coins worth $225. 

This doesn’t happen with real money. A central bank may choose to stop accepting high-denomination bills, as India’s did last year, but there is at least a central authority to determine what is and is not money. With Bitcoin, you have a bunch of programmers arguing over the merits of code.

I have been covering the internet for more than three decades, and on the internet, code is law. Software determines the limits of liberty. That is fine for software. For money, I don’t think that’s good enough.

Bottom Line on Bitcoin

With the Bitcoin “hard fork” seemingly settled, for now, support is returning to the virtual currency because, since its supply is limited by math and mining costs, its value seems unlimited. This may make it an investable commodity. 

But, none of this suggests that Bitcoin qualifies as “money.”

Money is a medium of exchange, what happens between selling and buying. Money in a vault is like the gold in Aladdin’s Cave. It’s just inflation waiting to happen. It’s only money in motion, enabling the exchange of goods and services, that really matters.

A stock’s price isn’t what every share would get. It’s what the latest share traded got. If you want to buy all the shares, that’s a different negotiation.

The same is true with Bitcoin. And Ethereum. And all the hundreds of other cryptocurrencies out there, which claim their supply is limited (buy now!) but whose supply is limited only by the imagination of traders and the cupidity of those they can convince to trade real money for new encryption keys.

Bitcoin is a symptom of too much cash chasing too few assets. Markets built on that basis always end in tears.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Saves the World,  available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares of companies mentioned in this story. To follow the value of crypto currencies bookmark https://coinmarketcap.com/


Article printed from InvestorPlace Media, http://investorplace.com/2017/07/the-big-lie-of-bitcoin/.

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