As demise of Mt. Gox shows, anyone investing in bitcoins is a fool

By Marc Jampole

Money has always been based on faith, even when it was theoretically convertible to gold or another precious metal. Throughout history, governments and economies have sometimes used gold, silver or copper as money, putting their faith in the value of these metals to others. But sometimes they have also used beads or shells or anything that can be counted, stored and transported without deterioration. It would be unwise, for example, to use raspberries as currency, because they spoil so quickly.

A better name for money is “currency,” because the word contains a definition of what money does—allows objects and services to flow without encumbrance between people and organizations. The current of these goods and services—their exchange from person to person—would be much harder if there weren’t some easy thing to count, handle and transfer to serve as a medium of exchange. I can’t negotiate with the supermarket, dry cleaner and bus driver to have them take something I’ve written in return for groceries, cleaning services and in-town transportation. They will take my money, though, and fortunately other companies will pay me the same to write articles, commercials, brochures, blog entries and websites.  Multiply my situation millions upon millions of times and you’ll see how much we as a society depend on having currency. Money is the lowest common denominator of exchange value.

Currency creates value relationships between different items. A loaf of bread may cost three dollars and a ticket to a first-run movie may cost twelve dollars, meaning that theoretically a movie ticket is worth four loaves of bread, except during a famine when four tickets to the movie might not even be tradable for a single slice of bread.  

In using money, we engage in an act of faith—faith that what we accept will have just about the same value when we want to spend it.  Usually governments issue currency and our faith in the currency reflects are faith in the government and the economy it controls. 

Having more than one kind of currency issued by more than one source by definition creates a value relationship between the different currencies, similar to the value relation between all products and services. Any value relationship is subject to change. For example, the euro, which serves as currency for 23 countries, may be worth $1.40 one month and $1.25 another. Political and economic events and decisions can affect the relationship between two currencies, just as it can affect the relationship between specific goods and services.

Without money, it’s impossible to conceive of any kind of complex economy. And yet only our collective faith in any specific type of money will enable us—society—to use it. If we didn’t believe that it would be accepted as exchange value by others, it would have no value to anyone.

Which is why anyone who invested even one dime in bitcoins was and is a fool.

The Bitcoin system is a computer-controlled private network consisting of s series of private enterprises that have agreed to follow the same protocols for “printing,” distributing and setting the value of bitcoins. The bitcoins exist entirely as numbers in accounts; there are no physical versions such as coins and paper bills. You can’t go to a bank and get a few bitcoins. Like all currencies, bitcoin value floats and is determined on the open market. If you bought one bitcoin a year ago, it’s worth more today—that is, unless you were holding it at Mt. Gox, which just went under. In that case, you may have lost everything. If an American bank fails, the money in your account is insured (up to $250,000 per person per bank). No such protection exists for those holding their bitcoins at Mt. Gox.

I fail to see any advantage of using bitcoins over euros, dollars, yuan or other currencies. All of these currencies are subject to failure—except that individual institutions and businesses fail much, much more frequently than governments do.  Dollars are backed by the “full faith and credit” of the U.S. government and euros are backed by the full faith and credit of the EU. What backs bitcoins? The full faith and credit of the Bitcoin system? What’s that?

Other than currency failure, there is another drawback to bitcoins: Organizations and individuals have to agree to accept payment in bitcoins, whereas they all accept the currency of the country in which they do business. Only if and when a significant number of organizations begin recognizing bitcoins as currency will it have a true exchange value. But the rampant speculation that makes bitcoin’s exchange value jerk up and down dramatically serves as an impediment for corporations to accept them as payment. Who wants to accept a bitcoin worth $579 the moment you sell your product knowing it may only be worth $400 in a week? That’s speculation, which, by the way, is a polite way of saying “gambling.” That’s what buying bitcoins has been from the start—nothing but a gamble.

Some may argue that one could use the bitcoin to hedge against a decline in all world currencies.  What they’re really saying is that an artificial currency that exists only as numbers in computers is a better hedge against a regional or worldwide economic disaster than gold or silver—things that are finite (you can’t print more gold) that you can hold, barter and use to make things.

People are attracted to the bitcoin concept because it represents the pie-in-the-sky ultimate in privatization. Instead of using government-issued currency, we’ll use private currency. But the bitcoin adds nothing to make the economy, society or individual asset holders any richer or safer. In fact, the unusual speculation in bitcoins makes it less safe as an investment. It may go up significantly in value, but it’s just as likely to go down.

People like to speculate, especially rich folk who buy paintings, baseball cards and vintage cars hoping they will increase is value. But if you buy a Manet and suddenly the world hates Manets, you still have a pretty picture. With bitcoins all you have is a bunch of numbers on the screen.

I’ll stick to dollars, euros and yuan—with an occasional Swiss franc thrown in for balance.