English | EN Bitcoin: buy, sell or wait?
Dec 9, 2013
The past few weeks have been filled with Bitcoin news: the price of BitCoin is exploding, China restricts banks from using BitCoins, someone bought a $100000 electric car with BitCoins, someone was digging through old trash to recover an old hard-drive with some bitcoins still on there, politicians in the US are worried that the BitCoin could lead to the fall of the dollar etc. etc. It has all the appearances of a hype. But what does this all mean? Should we jump in? Will we be too late if we don’t act now?
To start with these questions: no, you will lose nothing if you don’t jump in now. Sure, you may lose the chance of earning money in the rise of this new currency, but to value this you’d have to take into account the risks that are still attached to owning Bitcoins: regulators may still ban certain uses, the price may simply drop or large hacks may threaten the whole thing (though this seems purely theoretical at this point). If you happen to be a currency-trader, you may feel obliged to step in and of course the temptation is there for many: we’ve all heard get-rich-quick stories that we’d love to repeat. Still, the best moment for ‘ordinary’ people to step in would be when prices have somewhat stabilized and the currency begins its second life as an ordinary currency: to pay for things or to store money. Trading is one thing, but if we’d like to use it in everyday business transactions, we’d like some stability.
So what might be the long term impact of BitCoin? If and when the price of BitCoins starts to become somewhat stable, the effects may be very interesting: it would in effect be the first global, non-political, widely accepted currency available. It’s well protected against fraud (you can’t make counterfeit BitCoins) and it would be the final step in our money becoming digital. Could this change something in global trade? Could this mean something to countries with hyper-inflation? Could this threaten or strengthen the Euro or the dollar? What happens to our understanding of money when all it is, is a string of characters stored in a computer?
Meanwhile, the fact that the currency is not tied to any specific country could actually be a risk: there are already others trying to make their own ‘new currency’ that would compete with BitCoin. If one of these succeeds (for whatever reason) the value of BitCoins would rapidly collapse. Compare to the MySpace and Facebook transition. There are some ways to make this work smoothly without disruption, but no guarantees it would happen like that. Meanwhile, I’m thinking that it would be interesting to consider the scenario where a powerful nation would adopt Bitcoin as (one of) it’s official currencie(s), basically annexing the digital realm to their economy. It could be a wild ride, but in the long run I think that country would come out ahead. I’m thinking India should consider, to seal it’s position as an IT powerhouse?
Any economists in the room who care to set me straight?
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