Bit Coin Bubble
Last week we were amazed to hear that Bit Coins had reached the astronomical price of $4,800.
Bitcoins are electronically created and stored information bits which are assigned an arbitrary value by the Bit Coin creators, a private business. Bit Coins can be “mined” by solving mathematical problems or purchased for real money. Those Bit Coins are touted as a new electronic currency, free from government control.
Promoters liken Bit Coins to flat paper currency of the U.S. and other countries. However, there is one major difference, which is that dollars are a legal medium of exchange which must be accepted, whereas Bit Coins can only be used in transactions where both parties agree to use them. In practice this generally limits the utility of Bit Coins, and make it very difficult to convert Bit Coins to dollars. A second major difference is that, while the dollar loses about half its value every 20 years to inflation, that is no government or backing which could prevent Bit Coins from becoming worthless overnight.
Bit Coin enthusiasts brush off these obvious risks by pointing to the great increase in value of Bit Coins up to now. They expect the past history of Bit Coins to predict their future, while it would be better to look at some other past histories to gauge the future. There was, for example, the great tulip bubble in Holland which saw tulip bulb prices soar into the stratosphere, only to crash back down when reality set in. At least they got a Tulip bulb instead of an electronical blip. Think of the enthusiasm before the 1929 stock market crash, the 1999 internet bubble, or the 2008 housing bust, and the bitter disappointment which followed as investors re-learned the lesson that no tree grows to the sky.
Often the people hurt the worst in these bubbles are the ones who can afford it the least. They fantasize that the potential wealth will solve their financial problems while failing to take the concrete steps which could solve their problems over time. Listen to the wisdom of the Bible:
“He who works his land will have abundant food, but the one who chases fantasies will have his fill of poverty” – Proverbs 28:19
So don’t get caught up in the Bit Coin Bubble. Virtual money is like virtual kiss. It’s no substitute for the real thing.