Credit: Ireneusz Skorupa
Recently, my editor at this intrepid publication told me he was going to start paying me in bitcoins. Like any logical person, I responded by punching him in the face.
"But why, Bob?" he cried -- literally. It was embarrassing. "Bitcoin is a virtual currency, Bob. That's way better than the plain old U.S. dollar," he whined, holding his bleeding nose. I should've known the blubberer and the bubbler would be one and the same.
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If you ask me -- by default, you are, simply because you're reading now -- bitcoin is an overrated techno-bubble. Bitcoin works fine for now (sort of), but if you're thinking about retiring on a big bag of bitcoins, you can look forward to living out your golden years in a sparsely furnished refrigerator box on the corner of Broke and Why Me.
Those just returning from seven years of silence in a Tibetan monastery may not be familiar with the financial fad that is bitcoin. I'll let its Wikipedia entry sum it up:
Bitcoin is an open source peer-to-peer payment network and digital currency introduced in 2009 by pseudonymous developer "Satoshi Nakamoto". Bitcoin has been called a cryptocurrency because it uses public-key cryptography to secure funds. Users send payments by broadcasting digitally signed messages that transfer ownership of bitcoins, the unit of currency. A decentralized global network of specialized computers verifies and timestamps all transactions using a proof-of-work system. The operators of these computers, known as "miners", are rewarded with transaction fees and newly minted bitcoins.
Bitcoin has gained a lot of credence since its inception in 2009, especially among techno-hipsters and people who've been burned, scorched, or veritably incinerated in recent years by Wall St. Ponzi artists, hyper-greedy investment banks, lend-crazy mortgage companies, gigantic bailouts based on money our kids haven't even earned yet, and similar hiccups in our meatspace economy. To them, a virtual currency that works without the need to trust greedy middlemen; isn't subject to government regulation or taxation; is totally secure and anonymous; and seems to be growing exponentially in value -- well, what could be better?
That last bit about exponential growth is probably bitcoin's main attraction. To put it in the coma-inducing vernacular of economists and mathematicians, the original value of a bitcoin is to the current value of a bitcoin as a chocolate chip cookie is to the state of Montana. (Substitute your smaller object in comparison to vastly larger object of your choice for similar effect.)
Reason 1: What goes up must come down
But this remarkable rise in Bitcoin value is actually the first of three reasons that doom it in the long run. According to NewsBTC, a news site that knows all about the bitcoin market but nothing about humor, the value of a bitcoin was $500 at the beginning of this week and could be $1,000 today or more (in fact, bitcoins were valued at $911.77 at the time of this writing late Thursday evening). This is why my editor thought I'd be thrilled with a bitcoin salary. He'd pay me for a column today and I could buy a space vacation from that annoying blond British guy with the same money tomorrow. But he's dead wrong.
Nothing that fluctuates in value with such volatility (bitcoins have plunged in value in the past, too) can be considered a currency. Rather, it's a commodity, like pork bellies, orange juice, or moments of lucidity on Fox News. How can I sell a product for the price of a candy bar today and the price of a Volvo next week? This is great for speculators, but not for folks looking to manage their money over the long term and requiring a currency they can reliably turn liquid to afford goods, services, or the greens fees you so desperately need once you retire. No bank or trader is currently willing to bet against bitcoin value growth, so you can't count on there being a buyer for your coins when you're finally ready to sell them.