Bitcoin hit a new 2014 low last weekend, a news development that is surely distressful to Bitcoin investors (i.e. speculators), but one that shouldn't come as a surprise. After all, the premise that bitcoin, or any other alternative cryptocurrency, would "go mainstream" or become anything more than a speculative toy was flawed from the start. Here are three reasons why.
1. Volatility
As a currency, Bitcoin has little value if not converted into dollars, and the value of a single Bitcoin as represented by goods is essentially meaningless. Considering Bitcoin's extreme volatility since its inception, the asset gives the user absolutely no stability, or no store of value, a key component of any functioning currency.
Source: Coindesk.com
As the chart above shows, the cryptocurrency rose from almost nothing to over $1,000 before crashing down to below $300. Even on a day-to-day level, volatility reigns supreme as in the last week the currency has moved within an approximate 25% range. Bitcoin's rise from near zero has been dramatic, and it's easy to see how increased speculation sent the price of the asset flying, but like most bubbles there is little underpinning the actual value of Bitcoin.
While national currencies are backed by governments and fluctuate based on money supply other economic factors, Bitcoin's value is largely driven by speculators rather than people actually using the currency. In fact, one of the major drivers for the asset's surge last year was increased coverage and media hype, in part relating the downfall of Silk Road, the online black marketplace that accepted only Bitcoins, in October 2013. As the media attention has subdued, the price of Bitcoin has fallen, and Bitcoin transaction volume has been relatively flat, indicating adoption has not significantly grown.
2. There's no need for it
The dollar is the most valued currency in the world, and U.S. treasuries are considered the safest investment asset class. Bitcoin proponents make three main arguments for its use. First, that it can be the basis of a powerful global transaction network. Second, that it can be a better store of value than national currencies. And third, that it can be a safer and more efficient payment system. However, only the last of these holds any water as there is no need for Bitcoins to replace dollars in transactions, even if they can, and Bitcoin has demonstrated itself to be a poor store of value due to its volatility. With only about 13 million Bitcoins in circulation and the final number capped at 21 million, the supply is too limited for them to serve as a viable currency.
While the technology behind the cryptocurrency may represent a safer method of buying and selling over the Internet, the asset will never take hold as a currency due to its limited supply and speculator manipulation. The technology used to encrypt Bitcoin would be better applied to the current monetary system, rather than through the invention of an entirely new currency. Bitcoin is simply economic Esperanto. It's a solution without a problem. The currency in use works fine.
3. It's too shady
The fall of the Silk Road marketplace and the implosion of the Mt. Gox exchange earlier this year highlight another set of problems with Bitcoin. While the cryptocurrency seeks to solve the flaws of our current monetary system, it is not without its own set of troubles. Regulations on Bitcoin are still in development, and the currency has been deemed illegal in a handful of countries and restricted in many others. The IRS has ruled that the asset is not a currency but property, making it subject to capital gains tax. Instead of serving as a currency for honest exchange, Bitcoin has found itself to be a favored medium for money laundering and black market purchases of items such as drugs and child pornography. A New York regulatory agency last year called it, "A virtual Wild West for narcotraffickers and other criminals."
A game of financial Quidditch
Perhaps one Internet commenter best sums up the enthusiasm among Bitcoin supporters, saying, "The idea of a mathematically derived self-regulating currency completely divorced from any physical representation or central management is REALLY COOL.
I mean it's just a REALLY COOL experiment in economics and technology." Sure, Bitcoin may be interesting and cool in some sense of the word, but the quote underscores the idea that Bitcoin's appeal isn't underpinned by any practical application it serves, but mostly by a sense of fantasy or experimentation in a small percentage of the population. Quidditch, the sport invented by J.K. Rowling in her series of Harry Potter books, emerged from the fantasy world, but is now being played by more than 300 teams in 20 countries, according to the International Quidditch Association. Despite that success, to most of us the sport will remain a fictional invention, never to go mainstream.
Bitcoin is similar, except a lot more dangerous since it involves money. There will always be a place for Bitcoin and its ilk somewhere in the bowels of the Internet, but the cryptocurrency will never challenge the dollar as a medium of exchange.
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Report this Comment On October 11, 2014, at 1:35 PM, BlackDynamite wrote:
Thanks for living down to your name. Readers should definitely consider the source.
Report this Comment On October 11, 2014, at 2:28 PM, NealPalmquist wrote:
Never was there any HONEST reason to create more than just one bitcoin.
Zero divided zero times does not equal one and those do not add up to 21,000,000.
If you have an infinitely divisible bitcoin and if I also have an infinitely divisible bitcoin then at least one of us got screwed. You cannot give a unit of measure for thin air infinite divisibility as a mathematical property and then make it go anywhere by undoing that action when you multiply it 21 million times
Report this Comment On October 11, 2014, at 3:18 PM, beckeswins wrote:
The article says the technology would be better applied to other currencies rather than establishing it's own, but this displays how little the author understands the bitcoin technology because the currency and the technology are inseparable. One of the most mainstream values of bitcoin is it's peer to peer payment aspect. Send $100,000 to pakistan in 10 minutes from the comfort of your home and a cost of $0.05. Currently impossible to do any other way. This is huge. But it only works because of the distributed ledger at it's core. When you buy a bitcoin you buy into the distributed ledger...... And to the commenter NealPalmquist: greater divisibility is a desired feature of a currency. If a dollar were divisible to greater decimal places would it's value diminish? Of course not. Simple supply and demand along with elementary mathematics. :) Opportunity to learn people. We're writing history here.
Report this Comment On October 11, 2014, at 3:46 PM, MotleyBurger wrote:
Lol. Hilarious. Where'd you get these 3 reasons? 2012 ignorance called and wants it's already-proven dumb comments back. Seriously. Volatility? How volatile was the oil matket when we first switched to ground oil? New, small markets are volatile. And become less and less so as they grow. No need for it? Holy crap dude are you kidding??? That's like saying there was no need to shop online when we can just drive to the store. Bitcoin has countless uses capable of transforming the financial world. Remittances market (billions) is just one. Honestly, this article reads like something out of 2012. Back when journalists knew absolutely nothing about Bitcoin. If you want to say it's going to fail, bring up real concerns. Like the lack of direction in development priorities. The limited number of transactions per second. The difficulty acquiring and using it. These are the real concerns and all are being addressed.
Report this Comment On October 11, 2014, at 5:00 PM, valueseekinguy wrote:
I usually enjoy and appreciate the articles from Motley Fool but this one by Jeremy Bowman is so bad it makes me wonder what your standards are for allowing these essays on your web site.
"The three reasons Bitcoin is doomed" all show a gross misunderstanding of how Bitcoin works. Perhaps there is no one at Motley Fool that knows enough about Bitcoin and bitcoins to adequately screen or reject submissions on the subject.
Maybe you should stick to more conventional investment tips in areas where you know what you are talking about. Surely you are not so starved for material that you need to publish such a naive and amateurish opinion.
Report this Comment On October 11, 2014, at 6:55 PM, cyiwin wrote:
Yeah... I'm pretty sure this is a gag article.
Report this Comment On October 12, 2014, at 8:24 AM, pacafrat wrote:
"HoboClown" is obviously ill-informed when it comes to the subject of bitcoin(s). Plagiarizing 2 year old arguments that have long been discounted as a real threat to its demise is funny at best. The sad part is I think he actually believes what he's written here. I suggest he stick to flipping burgers since that seems to be one thing he really excels at. He might even consider accepting bitcoin for tips, maybe he could afford to buy his own restaurant someday. ;)
Report this Comment On October 12, 2014, at 9:03 AM, Dinofelis wrote:
I think most people forget the most important reason for Bitcoin, at least publicly. The most important reason is not transactions, or converting into fiat money or anything. The most important aspect is that Bitcoin is the only thing that can replace something that has been destroyed over the last few years: Banking Secrets. Even Switzerland fell to the pressure of invasive states.
If you are fed up of the theft by states (called taxes), and you want to do your money affairs outside of any external regard, then Bitcoin and other cryptocurrencies are a much more attractive alternative than even a Swiss bank account. If you want to do business without any state eye prying, without any state getting its sticky fingers on your transactions, if you want to transmit money to your children without them having to pay on your earned money, then Bitcoin can be a solution.
Yes, it is illegal. No, it isn't child porn or drugs. It is just taking back elementary freedom of doing business without the states stealing half of your earnings.
Swiss bank accounts used to do that.
Report this Comment On October 12, 2014, at 1:56 PM, graywolf33 wrote:
This article is ludricous especially coming from a financial web site. I'd expect an article of this calibre from People magazine or similar. "the supply is too limited for them to serve as a viable currency. " Seriously? Mr Bowman there's a new mathematical invention called "division" you might want to check out...seeing as you're in the financial reporting biz and all. Man I could go on and on tearing this article into tiny shreds but its not worth the time. All of these arguments were answered a long time ago. Yes bitcoin still has issues and growing pains but it also has a legion of amazing minds and VC money to back it up. I'd suggest readers go elsewhere for real info on bitcoin and I'd suggest Jeremy look for a writing job at People magazine.
Report this Comment On October 12, 2014, at 2:59 PM, ezeryezia wrote:
Bitcoin won't go anywhere in the mainstream because it has too many shortcomings; too expensive for micro-transactions, environmentally wasteful, incredibly volatile to name a few.
It's telling that none of the huge adopters (DELL, Expedia etc) have been touting significant sales figures. The only exception is Overstock that indicated it was doing 15,000 USD / day of Bitcoin business...which is pitiful.
However, one should be careful not to lump Bitcoin and crypto-currencies into the same bag.
The blockchain technology that Bitcoin pioneered has been developed by several successors seeking to address the failings of Bitcoin and provide a more mass-marketable 'internet-currency'.
For example; NXTCoin and Etherium are interesting, but one of the most interesting and one which builds on the 'reserve currency' status of the US Dollar, is BitSharesX asset BitUSD, a market pegged asset that has shown (so far) an extremely encouraging ability to hold near-parity with the Federal US Dollar.
The future won't be Bitcoin - not for the mainstream anyway - but one of its successors might well be.
Report this Comment On October 13, 2014, at 12:29 PM, ithinkerer wrote:
"Never was there any HONEST reason to create more than just one bitcoin."
-- It doesn't even make sense to ask that question. First of all, Bitcoins are programmatically limited to 8 decimal places, i.e. 100 million units in each bitcoin. So there are a total of 2,100 trillion transaction units in the Bitcoin protocol. There is absolutely no difference between 1 BTC divisible to 2,100 trillion or 21 million BTC divisible to 100 million. There are two reasons they weren't released all at once:
1. There is no fair way to decide who gets all 2,100 trillion units and how will that person distribute them.
2. There must be an incentive for mining from day one, so a predictable release of the supply is the only logical solution.
"If you have an infinitely divisible bitcoin and if I also have an infinitely divisible bitcoin then at least one of us got screwed."
-- That's the thing, your initial premise is false: bitcoin is not infinitely divisible. There may theoretically be no limit, but there is a practical limit and it's set at 100 million transactional units (satoshis) per Bitcoin. The software implementation of Bitcoin is limited to 8 decimal places and people can create their own fork with more decimal places, but even that fork won't be infinitely divisible. There is no way to transmit numbers with infinite floating points.
Report this Comment On January 04, 2015, at 5:17 PM, desrever wrote:
Volatility is being solved by NuBits
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