Bitcoins are Twenty-first Century Tulip Bulbs!

Filed under: Economy — Peter Asher at 1:54 am on Wednesday, January 8, 2014

The assigning of value to these tokens based on the fact that it costs a lot of IT activity to mine them is the equivalent of basing the value of Federal Reserve notes on the cost of their printing.

Even Fed printed money though, has some intrinsic value as debt is created by its issue and its acceptance in trade is mandated. Bitcoins, however, have no “backing” other than the socially agreed compact of honoring them at the prevailing market price based solely on their trading.

In this aspect they are precisely the same as the Tulip Bulb mania in 17th century Holland where at its peak, someone accepted one of the more exotic varieties as payment in full for their town house.

Buyers and sellers can agree on anything as a form of payment but there is never a guarantee that another seller will accept that form later. During the dot-com boom, some home sellers accepted mutual fund shares as payment but these had an intrinsic value.

Bitcoins will only have value as long as buyers are willing to purchase them and sellers are willing to accept them. There is no Central Bitcoin Bank and there is no FD(BC)IC insurance. The same group agreement that makes them viable now can turn to non-acceptance and make them worthless.

Even tulip bulbs, after the bubble burst had the value of one physical tulip bulb.

© Peter Asher, 1/7/2014

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