Tim Lee has an interesting and slightly odd post about Bitcoin today. He notes, correctly, that despite wild fluctuations in the price of Bitcoins, the volume of transactions has been growing at an exponential rate, then comes to an odd conclusion – he’s not going to sell his Bitcoins.
Here’s why this is odd:
1) Bitcoins are useful. This is without a doubt true. But what they are useful for is sort of…odd. They’re not so much a true medium of exchange, like USD, as much as they are a medium for a medium of exchange, which is why Lee references Western Union. They’re not so much a way to get money from one place to another as they are a vehicle to get money from one place to another. This leads to the next point…
2) Despite the weirdness of forex markets (a discussion for a later post) money is not an asset. In fact, if you ask JP Koning (and you should) money isn’t even a noun. And while Bitcoin definitely has some moneyness, it doesn’t really do what money does…if you also wanted to verb “money,” then, well…money moneys, but Bitcoin doesn’t money. What the heck does that mean? Well, look – I have some dollars in my checking and savings accounts. And while most of my savings are invested, I do want to keep some dollars as dollars even though I know they are losing value at roughly 0.1899% a day (assuming 2% annual inflation). Why do I do this? Because that rate is extremely reliable (unless you care about zerohedge, which I don’t). The Bitcoin market currently has two kinds of people – speculators and transactors, who basically seem to buy Bitcoin, make and exchange, and then on the other end sell Bitcoin. Everyone else is hoping the weird auto-deflation in the program means holding their Bitcoins will make them rich.
3) I do not think it will make them rich. Bitcoin’s ecology is extremely fragile. All it takes is one government crackdown, successful crack of its code, or some other exogenous shock and it will be instantaneously valueless.
So, in conclusion, I guess…don’t buy Bitcoins!