Need to look at what Bitcoin can't pay for.

by Glen Wallace

While there may be plenty of places you can buy stuff with Bitcoin, and that list may be growing, the important point is what you cannot 'pay for' with Bitcoin. 

In the US and other developed nations, there is a list of expenses that make up what is commonly referred to as the 'cost of living.' It is those expenses that must be spent in order to maintain a foundational level of modern industrialized society living comfort one is accustomed to.

It is those cost of living expenses that cannot be payed for with Bitcoin and I've seen no signs of any adoption of acceptance of Bitcoin as consideration of payment in those costs. 

Examples of those expenses that cannot be payed for with Bitcoin: Mortgage payments, HOA fees, Rent, Property taxes, public utilities, gas and electric, all types of insurance including property insurance, health insurance, auto insurance, student loan payments. It is only after all those essential expenses are made that maybe one can look for some nicety they can buy with Bitcoin. I think this lack of use for Bitcoin to pay for the costs of living expenses will greatly weaken future demand for the cryptocurrency. 

Right now I think people are mostly just flipping or hoping to flip the virtual currency with the goal of acquiring more dollars that can be then used to pay for those cost of living expenses and maybe a few niceties if there is some dollars left over.

Bitcoin Bubble

My comment in response to this article in the Atlantic

The reasons stated in the article for owning gold and silver were only the reasons why the elements sometimes do bubblize. But gold and silver also have some special properties that are very useful in industry and desirable in jewelry and decorations.

Gold and silver, and their inherent properties, cannot be practically duplicated. Bitcoin's only useful value is its blockchain technology that is open source and non-proprietary and therefore can easily be duplicated through the creation of a new cryptocurrency.

Currently there are around a 1,000 different cryptocurrencies out there that have either the same or variations of the same blockchain technology that Bitcoin uses. Because the blockchain technology is open source, public domain technology, there is no central authority that dictates how many different virtual currencies can be created.

Without any central control there is either the current problem of deflation with Bitcoin where everyone wants to save their coins and nobody wants to spend, or inflation as new virtual currencies come out and get used. But in the case of inflation, the retailers would start to become reluctant to accept virtual currencies because they will lose value before the retailer has a chance to turn around and use the virtual currency to buy more supplies and pay the bills.

There are some virtual currencies that are pegged to national currency, but with many of these cryptocoins, including Bitcoin, their monetary value is based on an exchange market prone to speculation by flippers who just are in search of more regular Dollars. And I think the bulk of the current demand is coming from flippers blowing up the bubble.

After other bubbles burst, the asset price comes back down to what end users are willing to pay for the asset. For instance, after the tulip bubble burst, I imagine tulip bulbs came down to a price gardeners, both professional and amateur, were willing to pay for the garden plant.

But what are end users, who just want to use a virtual currency for use in a transaction and not to flip, are willing to pay for a single Bitcoin? When thinking about that question, keep in mind that the use of gold and silver as a currency is founded upon the idea that they are both inherently scarce and have inherent demand beyond that of a currency.

With Bitcoin, the only end use for which there seems to be a demand is for use as a currency. Bitcoin doesn't seem to have the same scarce underpinning foundational value that gold and silver have. Rather, Bitcoin bitcoin has more of the characteristics of a fiat currency, but without the measured control of a central governing body carefully determining monetary supply and value. But without any agreement by a central authority that effectively pegs the supply and value of a fiat currency to the supply of goods and services of a nation, there doesn't seem to be any limit up or down in value. With Bitcoin right now we are seeing the 'no limit up' part, I'm guessing pretty soon we will see the 'no limit down' part.

Why I think Bitcoin’s price is so high and why I think it is a bubble approaching the bursting point.

The price is so high because so many people do not have a good conceptual understanding of how speculative financial bubbles work. All they see is the price of an asset continually rising and they don’t want to miss out. What they don’t realize is that a point of saturation is eventually reached where most that want to buy have already done so. And I think we are getting close to reaching that point given the current ‘hotness’ of the topic in regular mainstream non-financial news and forums.

Once all these newbies have jumped in that are going to jump in, then they just sit back and watch their computers and say “OK, let’s see it rise!” But the only thing that had been driving the price higher was from all the demand from all those Bitcoin newbies versus the supply from willing sellers. But with everybody already in that is going to get in, the balance shifts to a heavier supply of those wanting to sell than those wanting to buy. That is the point where the bubble bursting point approaches.

Now, as the trading price starts to steadily slide people say “Uh oh, let’s cut our losses and sell”. But if everyone wants to sell at the same time with few buyers, then you have a bursting of the bubble — a crash in the price of the asset. And the price doesn’t settle until it reaches a price where the asset’s intrinsic value is seen by the end users of that asset as worthwhile. For instance, after the tulip bulb bubble burst, I imagine the price of the bulbs settled back down to a price that gardeners were willing to pay for the bulbs.

To determine the non-bubble fair value for any asset, you need to be confident there is enough demand from a market of buyers who will say “sure I’ll pay that much for such and such an asset because I really want it or need it or know of somebody else that I can sell it to who really wants it or needs it for its intrinsic value.” But it’s hard to gauge Bitcoin’s intrinsic value even if it does have some useful value in a transaction, because while the number of Bitcoins may be necessarily limited, the number of other virtual currencies that use the same or basically the same blockchain technology that provides that usefulness, is not limited.