I try to read as many comments on articles that I write as possible. One reader asked why people were not addressing certain concerns posed about Bitcoin (BTC-USD)(COIN)(OTCQX:GBTC), specifically statements by the Fed Chairman, BIS and others. It it my intention to write articles that you want to read; so, this one is for you @soajustice.
Fed Chairman Powell on Bitcoin
Jerome Powell told members of Congress that “relatively unsophisticated investors see the asset go up in price, and they think: ‘This is great; I’ll buy this.’ In fact, there is no promise of that.
– CNBC, July 2018
First thing, there is no promise that any investment will go up. Relatively unsophisticated investors will make many mistakes, as will the sophisticated ones. The only real differences between sophisticated and unsophisticated investors are the ability to strategize and quantify risk (and their net worth if you’re using the textbook definition).
But, instead of just saying “Bitcoin is risky,” which would have been true and a fair warning; Mr. Powell seems to blame investors for taking an interest in Bitcoin, which has in fact gone up quite a lot over the years (although the price is very volatile). See below:
Year High Price 2010 $0.37 2011 $32 2012 $13 2013 $1,009 2014 $867 2015 $459 2016 $998 2017 $19,290
Data Source: blockchain.com
Mr. Powell goes on to say:
The Fed chairman also said cryptocurrencies are not real currencies because they have no intrinsic value.
– CNBC, July 2018
This attack doesn’t make much sense. What is intrinsic value after all?
Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, using fundamental analysis.
Bitcoin may not be a company, but neither is the US Dollar. A publication from the St. Louis Fed’s own website puts it plainly.
Bitcoin is not the only currency that has no intrinsic value. State monopoly currencies, such as the U.S. dollar, the euro, and the Swiss franc, have no intrinsic value either. They are fiat currencies created by government decree. The history of state monopoly currencies is a history of wild price swings and failures. This is why decentralized cryptocurrencies are a welcome addition to the existing currency system. – St. Louis Fed, 2018
While the US Dollar is backed by the ability of the government to enforce tax collection domestically and the ability of the armed forces to police it overseas; Bitcoin is an open source project that has proven robust because it has no single point of failure. Unlike the US dollar, which inflates away over time, Bitcoin has a limited supply and a growing user base, which causes it to increase in value over time. Bitcoin is backed by game theory, an active open source community and strong encryption. There is no way for someone to spend your Bitcoins unless they get your private key.
Sure Bitcoin is an experiment, but so far it appears to be working.
Bitcoin is too volatile to be a currency
In a recent article in the Washington Post, Matt O’Brien said “Bitcoin is Still a Total Disaster.” The only point that he seemed to raise in this article was that Bitcoin’s price is volatile.
It’s almost as if people think that there’s a Bitcoin head office somewhere. Every day the team of hundreds of hyped-up nerds all gather for the solitary purpose of making Bitcoin’s price “stable.” Each day they head into their cubicles and do their best after a pep talk and some Monster energy drinks. But, at the end of they day they hang their heads in shame, concede defeat and say to each other “We may have failed today, but we’ll nail it tomorrow for sure!”.
I’ve covered this in the past, by showing with data that Bitcoin is actually becoming more stable over time on its own. But, today I’d like to plug an author named Nic Carter who dealt with this in a different way.
Claim: Currencies are meant to be stable
“There’s one thing a currency is supposed to do that Bitcoin never has. That’s maintain a stable value.”
This assumes that Bitcoin is a currency, and that the definition of currency is normative (“x should do y”) as opposed to descriptive (“things of type x have the qualities y and z”). I’d classify Bitcoin the protocol as a complete monetary system, and Bitcoin the unit of value as a commodity money, which has the potential to become a gold-like reserve currency. Commodities fluctuate — that’s what they do.
– Coverage of Bitcoin is still a total Disaster, Medium
Bank of International Settlements on Bitcoin
First, cryptocurrencies simply do not scale like sovereign moneys. At the most basic level, to live up to their promise of decentralized* trust cryptocurrencies require each and every user to download and verify the history of all transactions ever made, including amount paid, payer, payee and other details. With every transaction adding a few hundred bytes, the ledger grows substantially over time. For example, at the time of…