I got a call from my mother yesterday afternoon asking me if she should buy Bitcoins with her probably too small for her age retirement account. She is an intelligent person, but when it comes to money and markets she doesn’t have a clue. She is the greater fool (sorry mom it’s true).
My first thought immediately went to wondering whether we were getting towards the end of the greater fool handoff of a commodity bubble where the last idiots rush in to buy from the smart money that is exiting. Unfortunately my mother fits that mold, though to be fair, I don’t believe she’s ever actually been caught on that side of a trade, so maybe I’m too harsh.
But my belief is that Bitcoin is not yet a “commodity” the way that oil is a commodity. Here’s the difference: the amount of oil being taken out of the ground has roughly corresponded to the number of barrels of oil used per day on earth, which is why save for a few times where that relationship has gotten out of hand for a little while, the price of oil basically stays within a band. The price of oil isn’t moving orders of magnitude because demand isn’t moving orders of magnitude compared to supply. There are a limited number of Bitcoins that will ever exists, similar to the amount of oil in the ground, though that has never really mattered to the price of oil, it was always more about how much was taken out of the ground. Unlike oil, only a tiny percentage of the population is using Bitcoins right now, which means that demand will increase by orders of magnitude in the future.
Bitcoin may exhibit a larger connection to gold given that unlike oil it can be used at certain times as a currency and there is only an olympic swimming pool sized amount of gold out of the ground on earth. This has kept the price of gold rising steadily as a hedge against inflation. It is a store of value that can sometimes be exchanged for goods and services. But again, unlike Bitcoins, basically everyone who wants to own gold already owns gold.
And Bitcoin is certainly not a currency in the sense that it is not widely used as a means of transfer of value right now by everyone and there is a finite supply of it, unlike US Dollars.
But none of these are “technologies”, none has the same market structure as Bitcoin. Bitcoin is all of these and none of these at the same time. It possesses aspects of each, but also has one thing those three do not—an adoption curve and finite supply.
There are so few people using Bitcoins right now. Compare that to how many will eventually use crypto-currencies in the future, probably everyone. Whether Bitcoin is the be-all and end-all of crypto-currencies is yet to be seen, but it has a good shot. And because so few people are using it right now, the sentiment regarding Bitcoin may end up looking more like the adoption curve of a new technology, such as the internet, than it does with a commodity bubble.
When my mom calls and asks if she should buy some Bitcoins, she is looking at it as an investment, yes. Her sentiment is reflecting the commodity aspect of Bitcoin. But when I see all of these different online merchants install the ability to pay for goods and services with Bitcoin, as Shopify did today, I see a technology adoption curve.
Remember, it takes a long time normally for a new technology to cross the chasm from early adopters to mass public adoption. How long did it take the internet? More than a decade. I believe this will go faster, but it won’t happen overnight. The technology piece of Bitcoin as a means of transfer of value without going through a banking system or relying on a central government or authority to provide backing to the currency is an extremely important thing.
Bitcoin can not be seen as a real “currency” until the majority of people on earth who will ever use it as a store of value are using it, because at that point it will lose its commodity-ish status. Volatility in price will drop. Until then it may be a means of trade, you convert dollars to bitcoin, trade, then convert back to dollars, but it’s not a currency.
Let me also address the insane argument that adoption of Bitcoin will lead to massive deflation and therefor either won’t happen or will crush the economy. Both of these lines of thinking are just stupid. First, just because something produces an outcome you don’t like doesn’t mean it won’t happen. Remember when people said that the internet wouldn’t be successful because it would destroy the newspapers and how would we get our news then? Sometimes things die, that’s the natural way of things, just accept it. Adverse outcomes for certain people or things are just reality.
Second, no, it won’t lead to deflation, it would only lead to deflation if tomorrow all governments on earth said that over the next 10 years you had to switch from their fiat currencies to Bitcoin and at the end you couldn’t use anything else. Then everyone would have to adopt and there would be massive hoarding and things would be priced in Bitcoin.
That isn’t happening, and things aren’t going to be priced only in Bitcoin for a long long time. Prices in Bitcoin will be pegged to the dollar. All of the different currencies, and Bitcoin, will continue to work as they do, and people will adopt to Bitcoin over time. Some will hoard it, but that won’t matter because things aren’t priced in Bitcoin at a steady rate. When everyone has eventually moved over to Bitcoin, there will be no hoarding, because there will be no reason for hoarding, everyone will be using it and there will be only marginal extra demand. So please, shut up about the deflation, you people have no clue.
Mark my words, the price of Bitcoin will continue to rise until everyone on earth who will eventually want to use Bitcoin is using Bitcoin, and that means everyone, unless Bitcoin is the Alta-Vista to someone else’s Google.
Then it’s worth nothing.
But for now it seems that Bitcoin will follow the technology adoption curve, not the commodity bubble curve. My mother is really calling because she keeps hearing about the internet of money and she wants to be involved early, it’s not really because she wants to get rich quick.
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