Should a currency be an investment?
http://www.telegraph.co.uk/finance/2773265/Billionaire-who-b...
Anyway this is ridiculous. People try to analyze an new phenomena with the old terminology. It doesn't work like that. You can't understand the change if you don't change your paradigm.
It also has a very large risk premium, which makes it inferior to other options for solely a long-term store of value.
>If you want to hedge against USD depreciation, BTC is one option.
Bitcoin is an imperfect hedge against U.S. dollar depreciation. There are valid reasons for investing in Bitcoin, but this should not be one of them.
Besides, so far, Bitcoin has been highly inflationary. In a bit more than a year, the number of bitcoins in circulation has doubled.
https://blockchain.info/charts/total-bitcoins?timespan=all&s...
Inflation and deflation are not solely functions of the supply of money. They are functions of the price of money, which is a function of both supply and demand. The price of goods, which have been reasonably stable in U.S. dollar terms, have fallen in terms of Bitcoin. Thus Bitcoin is presently deflationary, not inflationary.
Bitcoin aspires to be a currency and is presented as one, at the same time as trying to boost adoption by presenting itself as a cannot fail investment (hence built-in depreciation, mining etc), so I think it's a fair question.
If I declare white pebbles currency, and that there are only 20 pebbles acceptable, and each year I'll throw one into the deep sea, I have an appreciating currency. What is missing in my pebble currency is confidence, an intangible and difficult thing to acquire, and an easy thing to lose.
If you want to hedge against USD depreciation, BTC is one option.
If you want a hedge against USD depreciation, given the huge volatility of Bitcoin, I'd say it's far worse than most other assets, or even most other currencies. A hedge against inflation should not be volatile, it is meant to reduce risk, and ideally it should have an intrinsic value or very predictable demand.
It should also be in a regulated market - I wonder which of these exchanges will go bust because of this crash? If they guarantee a price in USD for bitcoin to users and the price plummets straight afterward, or regulations mean they can't sell the coins, they're going to be in an awkward place. There are no guarantees that anyone who has money in bitcoin will ever be able to convert it out into another currency, because any of these companies could go bust and leave their customers with nothing. That's a very different situation from most other assets.
BitCoin is a new thing; it does not map well to preceding concepts, be it "asset" or "currency" or something else entirely.
In the case of the US, the Fed constantly adjusts the dollars in circulation to further their monetary policies (typically low inflation, with economic growth), while in the case of BitCoin, the amount in circulation is set by a mathematical curve that is deflationary in nature.
Analyzing it as a deflationary currency (which many people treat as an "investment", because it increases in value over time) is about right.
- I can file a police report if my dollars are stolen, and there is a non-trivial chance I could get them back.
- I can store dollars at an insured institution, with a high degree of confidence in retrieving them again. [1]
- I [get to | have to] pay my taxes in dollars.
In essence, for all of our lifetimes, "currency" has always meant "state currency", with all the good and bad that goes with it. Even when precious metals were the norm, states still tended to get involved (stamping the Emperor's face on certain coins and giving those coins preferential treatment).
While BTC meets the definition for currency in some ways, it's probably more practical in our current financial ecosystem to think of them as a highly fungible (and volatile) asset. (As with the stock market, no one should be putting all their life savings into crypto-coins.) As the ecosystem continues to grow, this may change.
[1] This might be the balancing factor to the deflationary issue, to the extent that it matters: that most people might end up keeping their hoard at an insured, well-secured BTC Bank, and paying a small steady percentage for the assurance that their whole pile doesn't disappear.
I'd agree my usage of the term 'hedge' isn't useful. But it is nice to have something that has appreciated so well over time, where my own currency has sucked.
I don't worry too much whether it succeeds or fails, but I assume if it succeeds it'll have to move through the hysteria and a trough of disillusionment to find some niche.
But why would you want to? Inflation is bad if you have lots of money but no (prospects of) income. Retirees for instance. Most of you are in the opposite situation.
You can speculate in currency fluctuations in any currency, but to refer to a currency as an investment is a huge red flag for it as a currency, and for investment assets you should prefer slow appreciation over wild fluctuations and speculative moves.
Ever since Rich Dad, Poor Dad I've been careful to distinguish assets that bring income, and other forms of property and equity whose price is purely an illusion supported by speculators' predictions about other speculators' whims.