Editor’s note: This article was first published in December 2013; the Bitcoin price data it cites (worth $35 a few months earlier, $1,200 at the time, and swings of up to 40% in a single day) are from that time.
Some time ago we gave a formal definition (or tried to) of what Bitcoin is and answered the most common questions about this digital currency. I have to say that, after talking to supporters of the digital currency, not a single one of them has been able to give me a solid argument for why Bitcoin is not a bubble.
There are a few sayings that could be considered humorous, but they are starting to be used in our circle, and they give the rest of the world an unofficial but perfectly understandable definition.
Bitcoin is something Charles Ponzi would envy: it is the same thing he did, only legal and well regarded by everyone else.
— Victoria Bernal
To be fair, calling something a “Ponzi scheme” is very serious. But the truth is that a Ponzi scheme is based on paying earlier investors with the money that new ones bring in. In reality, every stock price rises this way, but with shares we can calculate some intrinsic value, whereas with Bitcoin not even the best economist on the planet could calculate its intrinsic value, as Alan Greenspan rightly said when he called Bitcoin a bubble.
The only difference between Bitcoin and tulip mania is that when tulip mania came to an end, people at least had a tulip. This time they would be left with nothing.
Given that tulip mania was cooked up in the Netherlands (Holland), the former head of the Dutch central bank must shudder at talk of a digital currency that was worth $35 a few months ago and is now worth $1,200, with swings of up to 40% in a single day, several days in a row. That is not serious.
Bitcoin would be a bubble, if it weren’t the clearest proof that human stupidity is the only thing that has no limits.
We have only recently come out of the dot-com bubble, we still have not come out of the housing crisis, and we are already committing another act of madness.
Bitcoin is the only thing where you can steal $100 million without a single official body going after the thief, and without it even making the TV news.
Since we cannot define what a bitcoin really is, it will be easier to say what Bitcoin is not:
Bitcoins do not belong to the category of assets, and they are not financial instruments either. They are so dangerous that financial derivatives have already been created whose underlying is something that is neither an asset, nor a financial instrument, nor a commodity, and whose intrinsic value can only be €0.
Bitcoin exists only because a group of people want it to exist. Like anything else, it is worth whatever a buyer is willing to pay for it, with one difference: a buyer acquires a bitcoin knowing that he is not buying anything, and is only investing in something that gives him the hope that a new buyer will be willing to pay him more than he paid.
As soon as buyers lose interest, Bitcoin will fall back to its real price, which is zero.
Sadly, some economists try to compare the way gold works with Bitcoin. The difference is that gold is a benchmark asset, while Bitcoin is the invention of a few people who have found the formula for creating so-called money out of nothing. In time we will find out how some have made a fortune by manipulating the “mines”, just as in Holland it came out that the tulip brokerage houses planted tulips to fatten their wealth.
Featured image: Boston Library ( NYT ); en.wikipedia.org, Public domain, via Wikimedia Commons.
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