Are Bitcoins money? Or another Ponzi scheme?

I blogged a week ago about Bitcoins, quoting investor Peter Schiff on the matter. His opinion: Bitcoins are not money and they constitute (yet another) grand Ponzi scheme. (Bitcoin was then $880.)

As I write, the price of 1 Bitcoin on the Mt  Gox exchange is $1,158. In fact, it jumped several dollars while I was typing this sentence! (It is now $1,155 or ¥118,372.881.)

Schiff’s argument is that Bitcoins lack the one key value that gold has, and that is that gold is valuable to people in itself, not just as money. Bitcoins are of no value to anyone other than as digital money, and indeed its value as digital money is still very limited, as this article shows:

There really aren’t big-name retailers on board with the digital currency at this time… big-name tech companies like Google, Amazon and eBay aren’t going to play along either, as they all have their own payment mechanisms to push (Google Wallet, PayPal and Amazon’s one-click checkout experience, respectively).”

But the list of vendors is growing at a pace that only rivals the explosion in the price of Bitcoin itself…

“There’s nothing you can do with a Bitcoin except give it to somebody else”

So Schiff’s argument is that Bitcoin does not have intrinsic value, unlike gold, which means that people will either use it to pay for things, or hoard it hoping its value will go up. Which means that people are hoarding it, because there are still not many businesses that accept Bitcoins as payment (although that number is growing).

Historian, economist and newsletter-writer Gary North has an article on Bitcoin today: Bitcoins: The Second Biggest Ponzi Scheme in History  (the biggest scheme is Social Security).

“Nobody is going to be getting rid of an asset that has moved from $2 to $1,000 in one year in order to buy pizzas.”

North’s point is that BITCOINS ARE NOT MONEY, because “The central benefit of money is its predictable purchasing power.”

Now let us look at bitcoins. The market value of one bitcoin has gone from about $2 to $1,000 in a year. This is not money. This commodity is not being bought for its services as money. It is unpredictable to a fault.

Admittedly, those who got in early on this Ponzi scheme are doing very well. They will probably continue to do well for a time. As more people hear about this investment, which is justified in terms of its future potential as money, more people will buy it. Late-comers are not buying it because they understand its potential as future money, any more than the late investors in Charles Ponzi’s scheme thought they were buying into the arbitrage potential of foreign postage stamps. They are buying Bitcoins because we are in the midst of a Ponzi scheme mania. They will continue to buy because they think this time it’s different.

This digital so-called money will not be used to facilitate exchange. Nobody is going to be getting rid of an asset that has moved from $2 to $1,000 in one year in order to buy pizzas. People want to hang onto it, refusing to sell, in the hopes that it will go to $2,000. This is the classic mark of Ponzi scheme psychology. People do not buy the investment for the benefits that the investment provides as an investment, in other words, because it is a capital asset. They buy it only because it has gone up in price. They expect this to continue.

Read the rest at Bitcoins: The Second Biggest Ponzi Scheme in History.

I must admit I was tempted at one point, once I could see the price movement of Bitcoin. However, I am not really interested in Bitcoin as an investment. I want to use it as a form of payment, an alternative to credit card and Paypal. However, the price of Bitcoin is now too high for me. I do not hold Bitcoins as of this writing.


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