Bitcoin and value

Ever since 1976 the US Dollar has been devoid of any gold backing. The history on how we arrived at this point is very interesting but alas quite long. It began with the Great Depression (especially with the Gold Reserve Act) and later with the Bretton-Woods system until we reached a point where dollar bills are printed without symbolizing any gold or physical good. Some might be tempted to say that money is worthless now, and like some crypto-coins or monopoly money, they only have value because people believe they do. This is not entirely true. What most don’t understand is that fiat money nowadays is backed by government coercion. You can’t pay your taxes in gold, you can’t pay your taxes in cabbages, salt or some other good. You have to pay it in government money and in case you don’t want to pay your taxes then you will get into trouble with the Law. It is the value of the legitimate use of force that keeps our printed currency afloat and with value. While this might not be true for all eternity and like Voltaire once said “at the end fiat money returns to its inner value – zero”, this is true for the time being.

Bitcoin does have value. While not being backed by any good in particular it does have the main advantage of being completely private and decentralized. Your transactions can simply not be tracked by the government (which opens up innumerous ethical dilemmas which we will not debate here). The problem arises when most people who are in fact investing in Bitcoins are doing so not because they wish to buy some random good on the Darkweb or take money away from a tyrannical government but simply because they hope it will appreciate like if it were a successful company share. Another problem is related to the profile of the investors: while many are in fact informed about the product and its implications, a good portion of them are in fact people without any experience or knowledge in investments. These types of investors are ideal for the good times (as they drive value up by buying in droves) but because they get nervous easily they also abandon the ship at the first impact creating instability in the market.

The last weeks have been a testimony of the incredible volatility of the crypto-coin market. The simple suggestion that the South Korean government might further regulate the crypto market was enough to trigger a significative drop in its value. This instability works at odds with Bitcoin’s supposed use: as a coin. Companies such as Valve (owner of Steam, by far the largest digital distribution platform for PC) have rejected Bitcoin as mean of purchase exactly due to its high volatility. Once Bitcoin loses its value as a mean of trade what is there to it? The Blockchain technology, the real great innovation, is not exclusive to Bitcoin and it is used by thousands of other alt-coins, many of whom are backed by actual real tangible goods, which leaves the flagship of cryptocoins in a dire situation.

To conclude, while I do believe that Bitcoin, at the moment, is still investment worthy, with thousands making a lot of money off it, I also believe that Bitcoin will eventually fade away (or crash). I don’t think it will accompany us in the coming years. Blockchain, however, might constitute the next big revolution in the business world with its cost cutting solutions and decentralized way of processing operations. Here lies the true investment for the future.

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