Bitcoin faith.

Any value that bitcoins might have is not derived from its unique software.  The bitcoin software is open source.  The number of potential competing currencies that could use the bitcoin software is unlimited.  The source of bitcoins value comes from the faith of holders of bitcoins that others will accept them in the future as payment in return for other things of value – just the same as with U.S. Dollars.

Both currencies, bitcoins and Dollars, are supported only by the faith of the holders and nothing else.  Both bitcoins and Dollars have no intrinsic value.  But, one big difference between bitcoins and Dollars is that the U.S. Government will accept U.S.Dollars for payment of debts owed to the U.S. Government.  The fact that bitcoins have most of the attributes of Dollars does not mean that they are a sound store of value.  Just like bitcoins, Dollars have no intrinsic value and any value is only  supported by faith.

If a person wants to speculate, an investment in bitcoins is appropriate.  If a person want a store of value, U.S. dollars are a better choice.  But, a better choice for store of value is an investment in a diversified portfolio of common stocks.  Common stocks represent ownership in valued physical and intellectual assets – essentially a broad basket of commodities.  Common stocks themselves would not do well as a currency, but if a “mutual fund” of diversified common stocks were to issue bitcoin-type credits based on bitcoin’s software and backed “dollar for dollar” by common stocks, those bitcoin-type credits could operate as an asset backed currency,

Bitcoin bubble?

The current Bitcoin phenomenon proves there is always a greater fool in speculative bubbles – until the bubble bursts.  The run up in price can only be due to speculation.  Bitcoins have no intrinsic value – whatever market value there might be is based only on what others are willing to give in return for the Bitcoins.  (Just like the U.S. Dollar – Bitcoins are not backed by gold or any other commodity.  Unlike the U.S. Dollar – government does not force others to accept your Bitcoins.)   If you want to gamble, start accumulating Bitcoins.  If you want to make money using Bitcoins, try arbitrage – quickly buy low in one market and sell high in another market.  Just don’t get caught holding Bitcoins when the bubble bursts.