18 February 2015

Missing The Point On Bitcoin

I came across this article a few days ago, basically a hit piece on Bitcoin. There's quite a number of these types of articles out there with more being penned almost every day. This one is a fine example of people who just plain miss the point of Bitcoin, which is similar to how some miss the point of owning precious metals. 

The author, Isabella Kaminska, runs down a list of common slams on Bitcoin and other cryptocurrencies: the value of Bitcoins in United States Dollars (USD) terms has collapsed, drug dealers and money launderers have used it, speculators took a ride on it, some Bitcoin-based operations have failed, etc. 

And you know what? That's all true. But it doesn't matter. To understand why, just replace "Bitcoin" with "USD" in that list of woes, or any other currency for that matter, and it's all still true: the value of the USD has collapsed before, drug dealers and money launderers use USD, speculators trade on wild swings in the value of USD relative to other currencies and to commodities, and plenty of USD-based operations have failed (banks).

The most damning thing on that list is the collapse of the price of Bitcoin, but like any other such event it must be understood in context. Yes, Bitcoin is down massively from its historic high. But as I type this, with Bitcoin sitting somewhere in the ballpark of $241, it's also still up astronomically from where it started: zero. The only people who got stung by the fall from its peak are people who tried to speculate on it and rolled snake eyes. People who mined their coins, or who purchased Bitcoin as insurance against a declining currency (much like the proper use of precious metals) probably are not feeling the sting so much.

That said, as an alternative store of value, Bitcoin's price movements do have to be understood in relation to the relative value of USD. As of now, USD is on a tear globally for several reasons, and therefore things priced in USD will tend to fall in price. Thus, when you compare gold and Bitcoin to the USD, similarities emerge. Have a look at these two charts, and mentally draw a line from peak-to-peak; notice the angle from left to right that they both follow?

One year gold chart sampled from the Money Metals Exchange website,
18 February 2015

One year Bitcoin chart sampled from Coinbase.com, 18 February 2015
The only thing that is really holding Bitcoin back is adoption and use. Kaminska tried to dismiss the level of use at present by making an apples-to-oranges comparison of current daily totals with a long-established credit card processor, failing to take into account (or deliberately ignoring) the massive growth Bitcoin use has undergone since its inception.

Meanwhile, unlike Bitcoin's built-in ultimate limit of twenty-one million Bitcoins that will ever exist, the USD continues to be conjured up out of thin air (the cause of inflation and the loss of purchasing power of each dollar). The USD is teetering on the brink of losing its status as the world's reserve currency, too, which will cause its value relative to other currencies and commodities to plunge. In that environment, alternative stores of value, such as Bitcoin, will rise in relative terms. And that's the point, not all of this other nonsense that Kaminska is throwing at it. When that happens, people like Kaminska who put their energy and time into bashing something they clearly don't understand will be caught out in the financial downpour with no umbrella.

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