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How many tulips will your bitcoin buy?

Ken Brown, MBA Programme Director

Faculty Blog

What makes bitcoin different

Source:  www.fanboysanonymous.com

In 2013 the value of a bitcoin fluctuated between  $20 and $1000, in late March 2014 it is now priced at around $590, but it can be pretty volatile.

(What is a bitcoin? Read here.)

Bitcoin advocates claim it as an alternative currency that cannot be manipulated by politicians, in the way that the dollar, pound and euro and many other currencies have been debased over the years.

For a currency to work it needs to be a store of value (one of the three main functions of a currency, the others being a medium of exchange and being a unit of account).  Bitcoin does not work yet as a store of value.  Not if the value can be over $1200 in December 2013 and not much more than $200 in February 2014 and back up to nearly $600 now.

 

Bitcoin price chart

Source: srsroccoreport.com (Bitcoin price in US$, Nov 2013 – March 2014)

So bitcoin fails as a store of value.  It does better as a medium of exchange.  The villa below on the island of Bali sold for over $500,000 and the price was paid for in bitcoins.

bitcoin villa purchase

This represents the largest purchase yet using bitcoins.  A feature of bitcoins is that it is harder to trace the identity of the buyers and sellers.  It is not like a credit card transaction which leaves a clear trail.  The bitcoin sale or purchase is anonymous, which has a certain appeal to some operating in the economy.

buy bitcoins

Source: The screen of a Bitcoin vending machine in Singapore. Photograph: EDGAR SU/REUTERS

Is the bitcoin craze just a symptom of the bubble like economy that holds just now?  Asset prices have been inflated on the back of central banks polices of quantitative easing and very low interest rates.  Stock markets are booming, property markets are booming and in that get rich quick atmosphere there is room for another financial fad.  So, is that all the bitcoin is … a financial fad, which will be swept away when this latest bubble bursts, as it will.  Investors will be left to wonder, ‘what were we thinking of?’  – putting our faith in an intangible computer run currency.  Or could a financial crash drive people to put their faith in a currency that cannot be manipulated by politicians.

bitcoin question mark

Phil Geib illustration related to Bitcoin payments. (Chicago Tribune/MCT) / MCT

What other currencies could there be out there that could serve as a store of value, safe from the politicians?  Surely not …

bitcoin - amazon

Source: amazon.com

 

What do you think?