Tobold's Blog
Thursday, December 07, 2017
 
An error of reasoning on Bitcoin

On 22nd May 2010, Laszlo Hanyec bought a pizza for 10,000 bitcoins. This Twitter page shows the current USD value of that pizza, which is $141 million today. It is nearly impossible to hear that story and not regret not having bought 10,000 bitcoins seven-and-a-half years ago for the price of a pizza, and be a multi-millionaire today. So why didn't we?

Bitcoins have no firm link to anything of real value, they aren't supported by gold, or by some brick-and-mortar assets, or by a government. The value of bitcoins is based purely on the stupidity and greed of the people buying it. So we deemed ourselves somewhat more intelligent and decided not to invest in bitcoins.

Our error of reasoning was the following: There are only limited quantities of gold, of brick-and-mortar assets, or of government assets. Human stupidity and greed is in near infinite supply. Thus a currency based on stupidity and greed can rise much, much higher than a currency based on real assets.

Please do not confuse this analysis with a recommendation to buy bitcoins today. You would lose your shirt. Like in any Ponzi scheme the main losers are always the ones investing last.

Comments:
Technically, there will only ever be 21 million BitCoins, so supplies are limited. And part of the appeal vs government assests is that they can't just inflate it away. If you're in Venezuela, Bitcoin is looking pretty good.

I'm not a crypto believer by any means, but I had some spare cash sitting in a savings account getting 0.05% interest so I moved some to Bitcoin three weeks ago. I have already doubled my money. I'm thinking of cashing out half and keeping the rest in there, reducing my future risk to zero.

Is BitCoin risky? Sure. Is it gambling? Well, it's been a winner all year and some legit banks will be doing futures markets based on it this month (which is why the price has been on a tear recently). People jumping in now won't experience the 1200% jump, but they'll likely experience something. As long as you don't risk more than you're willing to lose, you'll be fine, same as anything else.
 
Call a spade a spade. It's gambling. Congratulations on your win, but past performance at a casino is no predictor of future success, and anyone that buys it is taking a non 0 percent chance that either a) governments won't ban legit transactions in order to stop money laundering from criminal organizations (and you're an idiot if you don't think that's happening right now) or b) someone will not steal your bitcoins up from under you as you have no regulatory agency to argue / fight on your behalf and get your money back. I have friends that talk about it as an investment, and they've made wonderful "returns". Great for them. I won't be putting any of my retirement or investment down on #7 on the roulette wheel any time soon.
 
The value of a currency is determined by the readiness of people to use it as an instrument of payment. U.S. dollars are not worth the paper they are printed on because the number of U.S. dollars in existence is way above what the USA can offer in exchange for their dollars. But the readiness of people all over the world to accept U.S. dollars is what determines its value.
 
This is obviously a Ponzi scheme waiting for collapse with no government to save the idiots. However those who buy now and cash out before the collapse will make some really nice money.
 
The old Wall Street rule was that you had to cash out when the shoe shine boys were advising you to buy. I think bitcoin reached that point this week, despite the general absence of shoe shine boys in our economies.
 
What I wonder is will bitcoin from now on ever be used for what it was invented: as a method to pay for stuff? Looking at the exchange rate now noone in their right mind would pay for a pizza with it, instead just waiting for the right point to cash out.
 
I've been buying bitcoin for about a year now.
I've never held it for more than a week.
Reason being is that I send it immediately to family in Venezuela.
If I transfer AUD to their VEB bank accounts, the venezuelan bank gives me an 8 to 1 exchange rate .
Bitcoin on the black market in Venezuela gives around 400k to the dollar (not the bitcoin)
This is literally the only way to send money to Venezuela from overseas that doesn't incur a 99% tax.
I'm not the only one doing this, as Localbitcoin buyers and sellers in Venezuela are booming.
I'm sure it's the same in Zimbabwe, Ukraine and Iran.
Even Chile, which has a first world banking system, has high transaction costs to send money. WU will charge me around $70 for 1000. Plus a 2% credit card fee. more for smaller amounts.
Bitcoin charges me around $17.

The "drop to Zero" bubble case for bitcoin presupposes that there is no purpose to it other than an investment.
But there are real world cases for it's use.
Western Union is a $9billion company.
 
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