Money for Nothing

 It is difficult to avoid all the hype about crypto-currencies these days, even here in backwaters of the world like Northern Ireland.  My cynical nature means that I am never really likely to be a fan of these, but I'm not particularly knowledgeable about them, and a recent TV program both astounded me and piqued my interest into finding out just how flimsy their value really is.  So here's the disclaimer; this is all my opinion.  Feel free to have your own, and better yet if you disagree,  reply to this piece and show me where I am wrong.  I am not particularly against the companies mentioned here; I personally just choose to avoid them like the plague.

The best known crypto is obviously Bitcoin, so I have restricted my scant research to it.  Life is too short to start trying to find differences between them.

We all know how the real world economy works.  People make things, grow crops, write music or books, make movies, mine commodities like copper from the ground, or any one of thousands of things that people will pay for.  In the good old days governments kept an eye on the amount of economic activity in their territories and regulated the amount of money circulating there to keep things like inflation in check.  Of course over the last number of years that strange idea called quantitative easing means that most governments just printed (a metaphorical term, since much of it was just increases in available credit) more and more, and more, and more of the stuff, but at least this will have to be paid back sometime.  The only bad point about the pay back is that the money went to the richest in society, but the payback will come from taxes, and of course the rich are very good at avoiding these.

Now to Bitcoin.  Firstly the one similarity that I can see.  It can be used to pay for goods and services, and apparently some people do to a very limited degree. Now the differences.

1)  Currencies like UK Pounds, Euros, Dollars and all the rest have the official back up and support of their country.  If you have a few Dollars in your pocket, you have in essence the full 52 states behind you along with a central bank and a full legal apparatus.  A dollar may be just a piece of paper, but unless the entire USA suddenly disappears off the face of the globe, you have something that is almost physical.  Bitcoin by contrast has, so far as I can see, no backup whatsoever.  The Wikipedia entry on it states that no one even knows who set it up!  If you want to cash your Bitcoins in in a crisis, then where do you go, or will it all just melt into the ether that it originally came from?

2)  A UK pound has a reasonably set value.  I know that if I go to the shops today, I will have to hand over 1.3 of them to get a 2 litre carton of milk.  OK, inflation will gradually erode this over time, but even if you could hand over a Bitcoin in a shop to buy milk, how many of them would need?  The value of bitcoin is hugely volatile so although I largely know where I stand by holding Pounds, I may be poor or rich with Bitcoin, but predicting this from one day to the next is always going to be difficult.  This is because the Bitcoin value is not set against its buying power, but against the speculation of supply and demand in it.  Ok there are currency speculators on ordinary currencies, but this is based on very small changes relative to one another which are largely regulated by the economic performance of the countries.  And, when one trader wins in this process, another loses.  This is simple double entry accounting.  What is the value of Bitcoin based on, other than one person wanting to buy into it  a little more than another person?  Apparently Thailand is currently the world centre of Bitcoin trading by the way.

3)   I have already mentioned that Bitcoin's origins are something of a mystery, but there are more and more of them in existence every day.  This seems ridiculous for something that is by and large only a medium for speculation.  The law of supply and demand states that with more and more of them in existence, their value should drop unless the level of speculation in them is increasing at a faster rate.  So more and more people must be getting involved to keep this thing going.  If you have ever heard of the name Charles Ponzi, and the supposed money making scheme that he gave his name to, you might well see some similarities with Bitcoin.  It seems to me that any profits being made from Bitcoin are solely funded by the investments of others.  That is dangerous in the extreme, especially given the extent that this thing has been allowed to grow. With increasing numbers of Bitcoin in the market every day, and a relatively fixed number of investors, a time must come when the market is satiated, and then Bitcoin's price will collapse.

4)  Where do Bitcoins come from? It seems that Bitcoins can be created by a process called 'mining'.  There is even a company called Argo Blockchain listed on the London Stock Exchange which exists solely to mine Bitcoin.  I had a look at its web site to see if there was an explanation of exactly how this is done, but although the site has a page titled 'What we Do', it simply lists the company's data centres and its environmental policy.  What they do remains vague.  PayPal send me a message about Bitcoin once a week or so because apparently you can now trade Bitcoin on that platform.  Below, from one of these are what PayPal say are 'some of their 'most popular questions answered'.  People can dig deeper, but the ones presented are so shallow, I would hate to think that anyone buys into Bitcoin on the basis of information like this.


So, 'mining' means that simply by running an algorithm on a computer you can create wealth out of nothing?  You still consume the earth's precious resources like electricity, but all that happens is the number on a spreadsheet gets bigger.  Nothing of any use is created, no one gets fed or housed or any of the other physical things that are actually important in life and society.  If this does not prove to be an even worse scam than those sub prime mortgages that incinerated the worlds banking system back in 2007, I will be hugely surprised.  The emperor has new clothes, and they are made of Bitcoins.


See this BBC article to see just how quickly the values of Crypto can change!  Cryptocrash: ‘I was arrested for knocking on Luna boss's door' - BBC News



Comments

  1. Completely agree with you Ian. Bitcoin reeks of snake oil and as always, people are sucked in with the promise of easy returns then complain when it turns to custard. With the current state of the world, our investments have taken a hit but at least they're based on tangible assets and are unlikely to vanish in a puff of smoke. I'd have thought that in the current economic climate, Bitcoin holdings and the like will be the first casualties in any crash.

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