The Internet Age Emperor’s New Clothes

A Bit of a long shot

The BitCoin bubble is in full swing. But this bubble started a lot longer ago than most commentators report, and is much bigger than most commentators report.

The main reason is that most commentators give credence to BitCoin, and treat it like a respectable currency. Even laying aside the Silk Road connections, here at Vox Sapiens we have no confidence in BitCoin (or in its cousins such as LiteCoin and NameCoin). Here’s why.

Firstly, BitCoin is worse than the fiat currencies established by national governments and/or central banks. It is quite ironic that one of the main arguments posited by BitCoin advocates is that it is better than the US dollar because the US dollar is a fiat currency. Well sorry guys, but the BitCoin is just like the US dollar. In fact, from a value perspective, BitCoins are worse. At least the US dollar has the US government’s promise to back it – how valuable this is might be debatable but it is certainly not less than zero. BitCoin has absolutely no promise and hence can have no value. If you want to buy something from me and offer to pay with BitCoins I will tell you that they are worthless. And I am correct. You can do nothing with the BitCoins until somebody else has been persuaded that they have a certain value and is prepared to take them as payment for a good or service. With US dollars the situation is different. If you offer me dollars I cannot refuse to take them, because they constitute legal tender, I can only refuse the exchange rate that you offer compared to the good or service that I offer (i.e. I can disagree on the price).

Where BitCoin does have an edge is that its mining algorithm prevents inflation because there are only a finite number of BitCoins that can be mined. Beyond this limit, BitCoins cannot be generated – or “money cannot be printed” in the conventional currency paradigm.

Secondly, the underlying technology is too complex for people to handle. For sure the user interface is simple and people can quickly learn to send and receive BitCoins. People can also initiate the “backup wallet” command. But people have no idea how to prevent theft by malicious software. The number of virus infections show how poorly people are able to protect their PCs. Very soon the theft of BitCoins by trojan software could become one of the most lucrative crimes. And as for the idea of using online wallets – well if banks can’t keep credit card numbers secure what hope have most of the tiny, tiny start-ups out there?

Thirdly, cryptocurrencies are springing up like mushrooms. BitCoin might have “first mover advantage” but it is associated with Silk Road and losing that stigma may take some time, allowing alternatives to gain the mass appeal that will come.

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