Bitcoin – no historically proven value is a problem

Bitcoins (BTC) have relatively high value for the same reason that tulips had high value in the 1600s.  All things have exactly as much value as the good and services that people are willing to exchange for them.  Today, (9/14/2014) 1 BTCs can be exchanged for about $475.  The USD and BTC have one thing in common: Neither is backed by any commodity with historically proven value.  The USD is no longer backed by gold and BTC has never been backed by any physical commodity.   The U.S. Dollar does have one thing that BTC does not have: acceptance by the U.S. government for payment of debts owed to the government.   As long as the federal government taxes people, and as long as the federal government accepts  the USD in payment of taxes, then the USD will have that value.  The same is not true for BTC.   Unfortunately, in our current economy, I must hold a certain amount of USD in order live a reasonable life. But, most of my assets are held in the form of stock in businesses.

I believe that the future value of BTC will be about the same as tulip bulbs.  It would make sense to me to have and to own a cruuency that was backed by, for example, a specific number of shares of an S&P500 index fund, or by a total stock market index fund.  That kind of money would actually represent ownership in both physical and intangible assets that produce products and services that have historically been valued by many people.

Kurt Johnson, Urbandale, IA

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.