Bitcoin is a wonderful idea and perhaps the most foolish use of currency or investment in the history of mankind. We all know that fiat currency exists because it is backed by the full faith and credit of governments which are themselves drowning in debt owed to each other.
Yet despite this, fiat currency has value all over the world. Only with governments on the verge of collapse, like Venezuela, does currency have no meaning or value.
So in theory, the idea that a bitcoin is not backed by anything other than what other people are willing to pay for it is arguably little different.
However, I would never use bitcoin as a currency or as an investment for several reasons. The first reason is that real currency, as opposed to cryptocurrency, is involved in an incalculable number of transactions every day. Even in small countries, currency is exchanged with great rapidity, meaning it is highly liquid. Consequently, its value is subject to very little fluctuation.
Take the euro against the dollar. Over the past three years, we’ve seen monthly fluctuations that average 2%, with the largest change of 6.7% in January 2015. The euro was at $1.2632 in September 2014. Two years later it depreciated to $1.05. So its value, and this is strictly as measured against another currency, shifted 20% over two years.
The buying power of any currency itself, however, is dependent on inflation.
Extreme Volatility
The problem with bitcoin is the value as pegged to the dollar is ridiculously volatile. There are only some 6 million users of the currency worldwide. That’s nothing. That’s like a stock that trades a thousand shares a day. Consequently, the value of bitcoin is all over the place. You could buy a bitcoin one day for $1,000 and it could be worth $900 the next day.
Don’t believe me? The three charts below tell the story of enormous risk, from moment to moment, if you don’t purchase bitcoin in order to immediate spend it.
XBT:USD — Five-year performanceClick to Enlarge
XBT:USD — One-year performanceClick to Enlarge
XBT:USD — One-week performanceClick to Enlarge
In just the past week, bitcoin has lost 25% of its value!
What concerns me is something like what happened the other day. China shut down a bitcoin exchange. The cryptocurrency fell 13%. All the people in China who hold bitcoin are now panicked. Whatever money they dropped into bitcoin has vaporized because there is no market to trade it.
Never Happen?
I’m sure that bitcoin users around the world, and especially here in the U.S., think it could never happen here. Oh, really? Tell that to all the people who were backstabbed by the federal government when it shut down NetSpend virtual wallet for conducting online gambling transactions. Or on “Black Friday”, when the DOJ seized domains and shut down the major online poker websites. Millions were tied up for years, and in some cases, people did not get their money back.
Or somebody finally realizes that bitcoin is nothing but vapor unless people use it, and for any of a million reasons, its use drops off. The price declines quickly, and we have a scenario like the German hyperinflation of the 1920’s.
For heaven’s sake, it’s called a cryptocurrency, wherein the prefix means “hidden”.
The only thing bitcoin is good for is trading. Bitcoin Investment Trust (NASDAQ:GBTC) holds actual bitcoins — or rather the vapor that bitcoin represents since there are no actual coins — so the value of the Trust will fluctuate. It is also trading at a ridiculous premium to the underlying value of Bitcoin.
If you feel like gambling, or are an aggressive, speculative daytrader, then climb aboard the crazy train. Or buy Ethereum (another name that literally has a root that means “vapor”). I think you have to trade this based on technical and momentum. If you trade it at all.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com. As of this writing, he did not hold a position in any of the aforementioned securities.
