Tuesday, December 3, 2013

Down The Rabbit Hole To Bitcoins

Once again friends, we will take a trip down the rabbit hole to that amazing place where black is white and up is down. During our Thanksgiving festivities, someone suggested that I do a blog about bitcoins. I demurred, explaining that I knew nothing about them. But Friday morning I found and read an article about bitcoins by Dr. Gary North. It is an excellent article which I have since read a second time. I recommend it.

Dr. North refers to bitcoins as a ponzi scheme. After doing a little research, my opinion is that it is way so much more than a ponzi scheme. Before I started looking into bitcoins, I thought it was just another version of Paypal. A means to pay for on-line purchases without using a credit card. Not even close. It may have started out with some people using it this way but it has evolved into a financial chimera.

Someone by the name of Satoshi Nakamoto created bitcoins out of thin air. By the way, that isn't even his real name. So he starts by selling bitcoins for $2.00 each. Now, once he sells these coins, he is out of the loop until he "creates" and sells more coins. The highly involved book keeping process is now in the hands of a group of anonymous volunteers who get paid in, you guessed it, bitcoins.

Money started out as something of value that people could accrue to buy future products or services. It is what allowed society to grow through the division of labor. In ancient societies, it might have been sea shells. It soon became silver and gold. Substances with intrinsic value. Along came real coins. Finally came paper money with the good will of a government supporting it's value. One feature that is common to all of those exchange media it the consistency of value. Any fluctuations are small and may only be measured against other stable currencies.

Those $2.00 bitcoins are now worth  $1200.00. How or why the value of something that is really nothing could increase six hundred fold is beyond me. Greater faith has no man than that he would put down real money in expectation of selling a dream for more than he paid for it. Dr. North made an excellent point. "When someone wants you to invest in new money, hang on to your old money".

The closest thing that I can think of to the bitcoin situation is the Dutch tulip mania from the middle 1600s. Single tulip bulbs were selling at a price that would be roughly equivalent to over half a million dollars today. A few people made a lot of money. Many were ruined.

So here we are down at the bottom of the rabbit hole. As much as I enjoy the Cheshire Cat and the Mad Hatter, I think it is time for a return to sanity.

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