Bitcoin ain't it!
Bitcoin ain't it!
As admirers of Bitcoin cheer its All time High Valuations, one must remember Bitcoin is good innovation but it isn't going to work the way they say.
Bitcoin prices are very close to their All-time High in US Dollar terms. This has restarted the frenzy surrounding Bitcoin, with some predicting it will go to 1 Million dollars for one bitcoin.
I have admired the innovation of Bitcoin and have studied it carefully. Here are some quick pointers I want you to keep in mind while you buy Bitcoin:
Bitcoin is not a currency; it is an asset - a digital asset with a fixed supply. Hedgeye CEO Keith McCullough rightly puts it in the commodity group, considering its volatility characteristics and risk profile.
A fixed supply of Bitcoins is a limiting idea. Limiting the total amount of anything is a bad idea, particularly currency (competing with the role of the US Dollar) or store of value (competing with the role of Gold). A fixed supply is deflationary and bad for the economy. We need something that grows at a rate just a wee-bit higher rate than the world economy growth rate.
It is not about Trust. One of the claimed advantages of a distributed ledger system that underpins the Bitcoin ecosystem is that there is no necessity for a trusted institution to mediate a transaction. This is supposed to reduce the transaction costs and improve privacy. This is not true. In reality, you are removing a human trust arbiter with a black-box algorithmic trust arbiter. This is not a good way to deal with transactions.
It is about fixing responsibility. Instead of a trust-less system, you want a system with pin-point fixing of responsibility. When no one is responsible, it is a genuine free-for-all where might is right is the rule of the game. Rather we want someone specific, elected and answerable to the people who bears the responsibility for the system.
Bitcoin is not a store of value. It is a speculative asset, which is the antithesis of a store of value. The price of Bitcoin may reach 1 million, or it may reach zero, and such is the characteristic of a speculative asset, not of a store of value.
Other “Coins” with similar issues are in the same boat. No, they are no different. If they have same problems they cannot be currency nor can they be store of value.
Smart Contracts are not yet smart and not yet auto-enforceable. I have hope about possible use in Smart Contracts but there is a long way to go. “Performance of contract” is a wide and interpretive field. Some contracts lend themselves to easy determination as to whether contracts are performed or not, most do not. Disputes often arise and need a mechanism to settle. But this application will not be linked to Bitcoin or its ilk. I suspect it will work by applying elements of the Bitcoin system with Government currency like US Dollar. Even for this we will need auditing institutions that we will have to trust.