The Mt.Gox debacle has got some pundits chirping about how it will bring about the fall of Bitcoin. I came across this article in which an economist puts forward her ideas on why Bitcoin is a failed experiment and why it’s value will drop to zero.

I don’t agree with her, and here’s why (you’ll need to read her article first):

  1. She’s wrong on this statement: “Fiat currencies (money) are pegged to real assets and backed by governments“. Fiat currencies are basically backed by hot air and not by real assets. That all stopped when the dollar was decoupled from the gold standard in 1971. Currencies might be worth what governments say they are but that’s a fragile backing.
  2. She also says: “[Bitcoin’s] value rests with the demand of its buyers, holders, and the willingness of merchants to accept it” – that’s pretty much the same as for fiat currencies.
  3. She’s wrong about: “The value of Bitcoin relies on the holder’s ability to sell it on exchanges (or not).”. That might be true if you’re an investor but if you are using Bitcoin as a currency to buy/sell, then it’s as legitimate as buying/selling using any other currency. It’s “value” only exists in relation to other currencies, just as if you’re engaged in forex with other fiat currencies.
  4. If enough faith in the dollar were to disappear it’s value would crash too. Especially as there’s no physical asset like gold backing it. Oil might be backing it, but you saw what happened when the Petro-dollar was threatened when Saddam thought about switching to Petro-Euros.
  5. Those who held onto Deutchmarks in Nazi Germany also saw the value of that real-world currency drop. So a zero-value currency isn’t restricted to crypto-currencies. It also happens with any fiat currency where hyper-inflation kicks in.
  6. Had to laugh at this: “While we may dislike the government’s regulation and intervention into financial markets, their oversight prevents moral hazard and rampant fraud.” How come the 2008 financial crisis wasn’t averted then?
  7. Bitcoin transactions aren’t anonymous. They’re recorded in the blockchain. They are hidden from third-parties though by design (so they can’t be taxed for example). Bitcoin is like cash; once the transaction’s done, it’s done. But there is still a record of it.
  8. Then there’s “Asset prices should not appreciate significantly faster than real incomes unless there is a significant change in supply (like a natural disaster).” – so why are property prices allowed to soar in the real world? Government regulation should stop but but it hasn’t, anywhere (look at China now).

I don’t think she’s done good enough research. I don’t believe Bitcoin will tank and drop to a zero value. What happened with Mt. Gox is just another correction around a new financial instrument.

There have been a few such corrections over the last couple of months and Bitcoin has reacted pretty much the same way to each – value drops to $400-500, then creeps back up to $800-900. I’d say Bitcoin’s value is stabilizing as it’s been in the $400-900 range since December. I think it will stay there and probably stabilize around $800 in the long term. If I had money to spare, now’s one of the times I’d buy into Bitcoin.


Bitcoin’s changing value over the last couple of years [click image for larger view]

Sound off in the comments on where you think Bitcoin is going in 2014.

 

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