Q: Why do people think Bitcoin is valuable and why have they been willing to pay a lot for it?
A: Bitcoin combines two primary attributes. First, there will only ever be 21 million bitcoin. At some point, no more bitcoin will be “mined” through a combination of a fantastic expenditure of energy and computing power used to solve incredibly complex math problems. The fact that it is fixed leads many people to think it is superior to government currency which is devalued (but not made worthless as some claim) over time by government action to create more money. Second, bitcoin brings in the almost magical idea of technology. People seem to think the existence of the technology somehow turns bitcoin into something very special and potentially worth an enormous amount of money.
Q: Why are you so critical of bitcoin?
A: The fact that bitcoin is limited is not a special quality. Almost everything in the world is limited. Certainly, it would be possible to artifically declare a wide variety of things to be capped at a certain amount. This is part of how Beanie Babies became super valuable. The company would declare that only a certain amount of St. Patrick’s Day bear would be manufactured. Collectors went crazy and bid them up. Any of us could create a currency out of thin air, label it limited, and trade it. Hunterbucks. Fredbucks. Tomcoin. Janetokens. You get the idea. I think the existence of the technology used in Bitcoin causes people to fail to have adequate insight into what Bitcoin is.
Q: But you aren’t acknowledging the power of blockchain technology that undergirds bitcoin exchange. What about that?
A: I do acknowledge that blockchain technology potentially has a variety of applications. But let me ask you a question. Does buying Bitcoin entitle you to any future profits that might be generated from the blockchain? The answer is that it does not. You are not buying any ownership of shares of a productive company. You are just buying these digital tokens. They are only valuable to the extent people remain under the spell of the combination of artificial scarcity and technological wizardry. In time, that spell will be dispersed.
Q: But look at all the money people have made so far. What about that?
A: People who timed the exchange correctly made a ton of money on Beanie Babies or tulips in Holland. There is money to be made on the greater fool theory. As long as you can find a greater fool, you can make money. But eventually, there won’t be any more fools left to buy the electronic tokens which actually have no value.
Q: Aside from this analysis, are there any other reasons you’re so sure?
A: Yes. Governments will never tolerate their currencies being replaced by an alternative like Bitcoin. They will increasingly regulate it to the point that it won’t be worth holding. They have even sharply regulated holdings of gold in the past. There is little question they won’t permit Bitcoin to replace sovereign currency. China is already making moves. The U.S. is, as well. It will become ever more clear over time.
Q: Bitcoin is working for people right now. Why are you trying to mess with it?
A: I don’t think it really is working. Bitcoin was supposed to be a medium of exchange. That’s not really what people are doing with it. They are really holding it and trading it as though it were a new form of gold. But gold actually has some value. Note all those wedding bands. It is certainly better than a bunch of spent electricity recorded on a ledger somewhere. But what’s motivating me? I don’t want a bunch of good folks to be left holding the bag. I think this has been one of the greatest cons of all time.
Q: Okay, smart guy. What do you propose?
A: I’d say you should try to buy productive assets. In other words, try to buy shares of businesses that make profits which you can claim a part of either as a dividend or in the form of higher share values.