EDITORIAL: Don't Count on Bitcoin for Safe Haven in Recessionary Economy
August 8, 2011 7:00 PM
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The New York Stock Exchange has shed almost 1,500 points in the last month.
(Source: How Stuff Works)
Bitcoins, though, have suffered even deeper losses, and aren't a good investment to turn to.
(Source: Bitcoin Forum)
Treasury bonds are a far better investment that bitcoins in recessionary climates.
Cybercurrency is intriguing premise, but has seen a flurry of recent devaluation
I've recently heard a couple of advertisements on satellite radio suggesting, of all things, that customers
dive into bitcoins
as a "stable" investment in the midst of the troubled U.S. economy. In the midst of a seemingly impending recession, some might be tempted to try such a scheme. Let's be perfectly clear -- while bitcoins are a worthy pursuit to dabble in, considering them as a place to put your nest egg is a pretty poor decision.
I. Bitcoins are in a Recession Themselves
After a meteoric rise to prices of up to $30 USD/bitcoin at their peak, the crypto-currency has
to around $8 USD. This alone should be enough to convince any logical investor to stay away. But it's also important to consider the currency's strong current connection to the USD.
Over the last 30 days 82,099.28€ (Euros), $133,353.44 CAD (Canadian dollars), £119,336.29 (British pounds), and 607,234.53 PLN (Polish zloty) in Bitcoin have been traded on international exchanges. At current rates, that's approximately $659K USD in volume. By contrast, the top four USD-based exchanges managed $14.521M USD in trades, or roughly 22 times as much volume.
With approximately 95 percent of trades being in USD, the fortune of the USD intimately affects the fortune of the bitcoin.
When you combine the aspects that bitcoins are tied to the fate of the U.S. economy and that they've been on a downward plunge even sharper than the U.S. economy, the outlook is not pretty for bitcoins as a serious investment bid. Even amid the stock market's huge losses (with today's $300+ USD decline, the New York Stock Exchange is at its lowest level since December 2010), bitcoins are still not a solid alternative to guaranteed securities like treasury bonds, or a diverse portfolio.
II. Bitcoin Mining is in the Midst of a Correction
Another issue with bitcoin looms on the mining end. Bitcoin is trying to condense the natural creation of a non-commodity currency to just a couple decades, so it relies on initial seeding of wealth (similar to how people laid claim to natural resource stakes, which in turn gave rise to non-commodity wealth).
But the seeding is hitting a roadblock, as it's no longer advantageous to mine. With difficulty soaring, it's now
for most video cards to break even. The
fastest graphics cards
by Advanced Micro Devices, Inc. (
) still stand a chance to break even, but they require more than a year of work.
Meanwhile, the difficulty continues to rise at an unforgiving pace.
For those who already have money sunk into bitcoin hardware, they may keep mining for a time, but it may be unsurprising if they start to sell off their stockpiled hardware.
In the long term the market will thus correct itself as, in theory, computation gains will outpace the rate of mining. However, now is simply not a great time to enter the market as a miner.
III. The Big Picture
Returning to the original point, given the current climate bitcoins are not a much safer investment than stocks, as some purport them to be. They're actually much worse, at present.
This picture may change, when and if:
Bitcoin trade in foreign currencies picks up, allowing a truly independent currency.
Bitcoin mining difficulties stabilize.
Bitcoin exchange prices stabilize.
Until these corrections fall into place, the currency is simply not a viable investment.
Fans of bitcoin may react negatively to this analysis, but it's hard to argue the hard facts. Bitcoin is a terrific concept, and one worth supporting. But when it comes to your money, an investment in bitcoins today, is essentially throwing away a chunk of your money, or perhaps breaking even in the case of mining (given hardware depreciation).
So as the U.S. faces a potential "double dip" recession, consider building a diverse portfolio of bonds, commodities, and stock from highly stable companies (
) as a way to guard your assets -- and avoid the bitcoins.
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RE: Dumb crap
8/10/2011 11:50:29 AM
I agree and disagree.
When I say no inflation, I mean there is no central bank that can randomly choose to print bitcoins because of some political motivation (like the Fed). As long as there is bitcoin mining going on (which inflation is programmed into the protocol), there will be BTC inflation by design. But the supply of BTC is limited greatly (unlike the USD and other world currencies) and at the moment any inflation is countered by increasing demand for a currency with the stability of BTC.
The exchange rate that is fluctuating now for BTC is kind of an IPO so to speak where people find out how much the commodity is actually worth through speculator trial and error. It may turn out to be worth more than people think it is like Netflix, or it may turn out to be a stinker like Divx.
But unlike a stock BTC does not have some CEO calling shots that would affect the value of the currency. Its value is only what the investors make of it. That is to say if everyone agrees that it is valuable then everyone will value it (like the USD since the paper actually has zero value). So in the early days it will fluctuate greatly I believe, but you can at least sleep soundly knowing that it isn't fluctuating because the President wants to be reelected or because we can't get out of Afghanistan or any other thing you can think of that would constitute a political influence on a fiat currency.
Not to mention that in this economy with Bernanke at the helm fluctuations of the BTC/USD x-rate have more to do with the weakening of the USD than anything. In fact, it the USD, Euro or what have you would stop losing value then people would have little interest in something relatively stable (as it is in theory since it is still to early to witness the stability) like BTC.
Sorry, I'm rambling a bit as I was only an international business major and not a formerly trained economist. But what I'm saying is:
1) there will be fluctuation AGAINST the USD (just like with gold)
2) inflation due to currency/commodity supply (like gold)
3) and change in demand as people flee to a theoretically safer currency (compared to fiat currency)
4) But my main point is that supply (affecting inflation rate) is not politically influenced. So it is not like the USD and the other unstable currencies of the world that are subject to hyperinflation.
"Paying an extra $500 for a computer in this environment -- same piece of hardware -- paying $500 more to get a logo on it? I think that's a more challenging proposition for the average person than it used to be." -- Steve Ballmer
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