Thursday, December 14, 2017

OK, Bitcoin

      Ok, I am breaking down to write something about Bitcoin.  It seems that everyone I talk to has a question about it.  The problem is that virtually everything I can think of about the subject has been said - usually many times.  In my view, the best summary is the one provided by John Cochrane in his blog (a link is on the left).  But there is one thing that has perhaps not received enough attention.

       Imagine you walk into an office supply store to buy a ball point pen.  You see two identical pens on the shelf.  One costs $5 and the other costs $50.  If you think that makes no sense you are applying the law of one price.  The law of one price says that identical goods sold in the same market must sell at the same price.

       There are currently about 160 cryptocurrencies and they trade at nothing like the same price.  Bitcoin, currently at about $16,000, trades at a price up to 100 times that of its major competitors.  How do they differ?  Not in terms of payout - none of the cryptocurrencies offer any dividend or interest.  Not really in terms of their use as a medium of exchange - Bitcoin may have a tiny advantage here but none of the cryptocurrencies viably competes with the dollar.  Not in terms of the way they are organized or exchanged - all of them use blockchain technology.  Why then the big price difference?  All I can think of is that Bitcoin is a better vehicle for speculation.  Because it is better known people think that other people will buy it at a higher future price.  In other words, Bitcoin is a better bubble vehicle.  Which suggests that Bitcoin's price is a bubble in the first place.

       One final thing.  Some people say that Bitcoin's current price, and higher future prices, are justified because the supply is limited.  The supply of what?  While it is true that there can be no more than 21 million Bitcoins, there is no limitation on cryptocurrencies.  Saying the supply is limited is like saying the supply of Pentel pens is limited.  Who cares is other suppliers are making identical pens.

        My bottom line on Bitcoin - stay away.

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