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.