Investing in Bitcoin changes the nature of Bitcoin. If people don’t invest in it, and use it like a currency, it has value. As soon as people start investing in it, it stops functioning like a currency, and no longer has any value. Given that some nation states have failed to control their currency, it was hopelessly naïve to think that a very simple money supply algorithm could.
Everything new is old again
As a distributed currency, not only does it not work very well as a currency, it won’t be very distributed. We’re seeing mining become increasingly concentrated in those with the money and expertise to invest in banks of single-purpose computing devices. Remember, its the majority of mining power that controls what happens to Bitcoin. Now, it appears, with the Winklevoss brothers, it’s big money cornering the market; the rich using something overvalued to become even richer. That wasn’t the basis of the 2008 financial crisis, was it? I can’t imagine this is the brave new financial world, the cypherpunks were promised.
Can we fix it? No we can’t
The majority of mining power could change the underlying supply to try to fix Bitcoin’s problems, but this brings its own problem. Big money has for company big lawsuits. If the supply of new bitcoins is made variable, to stop hoarding and to try to make it work as a viable currency, the price is going to drop dramatically. Partly because of the necessary increase as Bitcoin gets new adopters, but also because of the short-term uncertainty and loss of confidence. If the Winklevoss brothers feel this has caused them to not make quite as much profit as they thought they were going to, what will they do? Find everyone they can who’s associated with the change, and sue them for millions.
The measure of a bitcoin
If we look at Bitcoin’s value over its history, we can see two different parts. There’s the bubble part and an underlying part. In the middle of 2011, Bitcoin went through its first bubble, and we’re currently in the middle of a bubble now. So far, the current bubble looks the same as the first one. The spike on the graph is taller and slightly wider, but it’s basically the same shape. The algorithm hasn’t changed and neither has people’s reaction to the idea of making a quick buck. Every time Bitcoin bubbles, it’s going to be the same, until everyone gets bored and loses interest.
If you take away those two spikes, you get a general trend showing its utility to drug users and American gamblers. Doing this, you get an underlying value for one bitcoin somewhere around twenty dollars. Which is fine, until those who imbibe drugs or gamble in countries where the government would rather you didn’t, move on to “Bitcoin 2.0”, whatever it is, that fixes some of Bitcoin’s negatives.