The Bitcoin Puzzle

What is a "crypto-currency"? What are Bitcoins and all the rest of the crypto-currency pack?

They are digits on computers, and nothing more. What is "a digit on a computer"? The definition would seem to run along the lines of "an electric charge in a computer memory".

If the ownership of a crypto-currency digit on a computer, or more exactly, on  a "blockchain system" of computers, constituted a legal right to a thing that has objective existence, say 1 kilo of copper, or 1 ounce of silver, or 1 ounce of gold, or any other physically existing commodity in a legally constituted depository, then I would have no problem with such a "crypto-currency". However, so far as I know, none of the crypto-currencies carry with them any legal right to the ownership of anything tangible at all.

In this regard, they are like today's "money", which has no relation at all to any underlying physically existing good. The crypto-currencies are regarded as valuable assets because when they were born, someone had the bright idea of saying that they were money. That simple affirmation impacted masses of people anxious to make a buck quickly and easily, and these poor innocents are not able to think things through carefully. If something - whatever it is - appears to have a rapidly increasing monetary value, there will be thousands - or millions - of individuals anxious to get into the scheme. This has happened, time and again, throughout History, and doubtless will happen again, ending in inevitable  disappointment and loss for all these gullible "investors".

What distinguishes the Bitcoin from all the world's currencies today, is that the currencies of the world - the dollar, the euro, the British pound, etc. - all are issued by Central Banks that regulate as carefully as they can, the worth of their currencies in terms of each other.

The great mass of the world's currencies are, like the Bitcoin and its fellows, simply digits on computer memories. No Central Bank wants its monetary digits to rise substantially in value against the other Central Bank monetary digits, because that would affect their country's exports; and conversely, no Central Bank wants to see its currency digits depreciate against other Central Bank currency digits, as that would lead to rises in national prices and Capital Flight, since investors would sell those falling currency digits in order to purchase others which would be rising in relation to the falling currency digits. Central Banks are the "shepherds" of the currency digits they issue.

The Bitcoin was able to rise to some $15,000 dollar digits in value, when the appetite for it was voracious, but it will also be able to fall to virtually nothing, when the bloom is off the rose - because the Bitcoin and its imitators have no "shepherds" to take care of them.

As of this writing the Bitcoin is quoted at about $6,100 dollars, and so supposed to be worth almost 5 ounces of gold. Sometime in the near future, I expect one of the dozen largest holders of Bitcoin balances is going to want to reduce his holdings. That is going to be something to watch, because suddenly, everybody will seem to want to reduce their own holdings, and that's "Sayonara" for Bitcoin and its fellows.

The crypto-currencies are a modern instance of "The Madness of Crowds" and they are  going to cause a lot of grief, in due course of Time.

Originally published at http://plata.com.mx/enUS/More/356?idioma=2