BitCoin is a Crytocurrency which can be used to make payments digitally i.e through the internet.
Crytocurrency in layman’s terms means a digital currency that is encrypted to make it secure against counterfeiting or loss.
As per the definition hosted on the BitCoin website:
Bitcoin uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of bitcoins is carried out collectively by the network…..
The first thing that strikes you about the entire genesis of Bitcoin is the fact that it operates with “no central authority or banks“.
This effectively means that Bitcoins work without the guarantee of a Central Bank or Authority…. something that must immediately send alarm bells ringing.
Bitcoin claims to be a digital currency… a currency of the future. So before I attempt to explain why one should never invest in Bitcoins or any other cryptocurrency for that matter, I must go back to the basics and try to understand what Money and Currency actually mean.
Money is something which is generally accepted as a medium of exchange and acts both as a measure and a store of value.
As a medium of exchange, money can be used for acquiring goods or services. It is a measure of value as the cost of goods and services are expressed in terms of money. As a store of value, money can be used to transfer purchasing power from the present to the future. Thus, money is something which retains its value overtime.
Next we come to the definition of currency. Currency is money in circulation which is issued and guaranteed by the Government. It is this backing of the government which gives currency its value. Without this guarantee a hundred dollar bill would have no more value than any other piece of scrap paper.
Now let us concentrate on the most important characteristic of bitcoin – the fact that it operates “without any central authority or banks.”
My question then is, if it is not the Government, who guarantees that a unit of Bitcoin has some value? The answer is NO ONE DOES!
It is for this very reason that a BitCoin can never be a store of value. Its value would fluctuate just like the value of any other commodity based on the principles of demand and supply. When demand increases, its value increases. When demand falls, its value falls.
Thus, a BitCoin is not a currency as it purports to be… it is just a commodity and a very volatile one at that.
So Bitcoins are after all just another commodity that you buy with real money. Now, read that again.
Now tell me why do people buy commodities like gold or silver? Gold or Silver have some inherent value because they are useful and are available in a limited quantity. They are assets, and just like money they too are a store of value.
Bitcoins on the other hand are just pieces of computer codes that have no inherent value.
Now, given the fact that Bitcoins do not have any inherent value, it does not quite fall under the definition of commodity as well.
One might argue that the number of Bitcoins to be ever brought into circulation is fixed – thus making it valuable. However, remember that just because a commodity is limited in quantity, it does not in itself make it useful.
A commodity has to have some use for it to be considered valuable.
Remember that one of the world’s most valuable commodity is uranium. Why is uranium so valuable?
It is because Uranium is the fuel that Nuclear Power Stations use to generate electricity.
In contrast to this consider Bitcoins which has no use case.
And, the genius of it’s propagators lie in the fact that they have successfully made people part with their real money to own a virtual software code that neither has any inherent value nor derives any value from any sort of government guarantee.
Its like owning a piece of thin air.
But then, if this really has no value, why are Bitcoin prices soaring so high?
The answer lies in greed.
People driven by greed; having seen the recent surge in prices, are buying Bitcoins in large quantities. Since the bitcoin marketplace is in its nascent stages (both in terms of the number of participants and the amount of Bitcoins available) , even a small number of buyers can push the demand very high leading to a further surge in prices. This further induces people to put more money in and the cycle continues.
However, remember that Bitcoins by themselves have no value. All it takes is a change in sentiment among buyers for the prices to come down crashing. The change in sentiment could be brought about by a number of factors. There could be a Government advisory against Bitcoins or worse still there could be an outright ban. There could be technical glitches (remember Bitcoins are nothing but computer codes) or the system might be hacked into. There might also be news about some kind of fraud within the system.
All this would create panic among the market participants leading to a large scale sell off and the so called virtual currency could virtually turn worthless overnight.
So can Bitcoins turn worthless? Yes says its official website…
The last word – Stay Safe! Please don’t try Bitcoins at home.
Image Source: Techcrunch
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