Remember Bitcoin ? For a time, it seemed, it was everyone's favorite alternative to both fiat currency and gold , and hype once drove its price very high (over $1,000 per unit, whatever that means). As is probably clear already, I am far from neutral on the issue of Bitcoin's supposed "value."
I have always advised investors that it is foolish to transform any amount of money backed by a state, subject though such money may be to inflation, into a math based currency invented (or not) by this guy and popularized by a Magic the Gathering card trading site. The more I read arguments supporting the idea that Bitcoin has some inherent value, the more I come to believe that a great many people were never taught the meaning of those words. Bitcoin derives its value from the faith investors have that its value will rise, and since most speculative investors consider their Bitcoins too valuable to spend, the infrastructure that might have given the imaginary currency a chance has never really materialized.
Since Bitcoin's price is pegged to nothing, it derives its value from psychology only, the result of which can be almost anything. For example, when Bitcoin was worth over $1,000 per unit, it was because of the belief that its price would rise much higher. Yet as foolish as the illusion of appreciation now seems, Bitcoin's price has, over the last six months or so, fallen under the sway of the equally foolish illusion of stability: an illusion that has just been dispelled.
After trading in a narrow range for months, Bitcoin lost 16% of its value in the week of August 11 to August 18, and the rout does not appear to be over, as the price is falling again today. (Prices are taken from http://bitcoinaverage.com .)
Why would this happen? Well, because we are talking about a purely psychological value, an equally valid question is "why wouldn't it happen?" but I believe I know what has broken the current spell. More and more Bitcoin owners are reporting that they have lost their Bitcoins - usually as a result of failed transactions. Lost Bitcoins are not just lost to their owner, mind you, they are lost to the blockchain, which means they are gone forever, much as if gold were to dissolve into thin air the moment it slipped out of your pocket.
With most investments, the loss of some units would increase the value of the others, but there are three reasons why this doesn't work with Bitcoins. First, the reason for the increase in value is that, whatever the total value of the investment, it now has a smaller divisor, but the Bitcoin blockchain has no inherent value, so the divisor is irrelevant. Second, no one has any way of knowing how much of the blockchain has already been lost. Third, the issue is a technical one, and it further erodes confidence in the viability of Bitcoin as a currency.
If it comes to be believed, as it well might, that all Bitcoins will inevitably find their way under the car seats of failed technology, the idea will begin to arise that Bitcoins are headed for zero. As the idea rises, it will self-manifest (psychology only, remember). When this happens, and it could be as soon as this afternoon, the value of Bitcoin will race toward zero faster than it ever raced toward $1,000.
So, where should you put your money? Try the SPDR S&P 500 ETF (spy), a fund you can buy as easily as a stock which mimics the return of the entire stock market. Despite all the volatility and all the fiat- whatever of the last twenty years, SPY has gone from $47.66 to $197.26 in that time, a gain of 314%.
Julian Close has been a business writer since the first day of the twenty-first century, having written for PRA International and the United Nations Department of Peacekeeping. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. He became a stockbroker in 1993, but now works for Fresh Brewed Media and uses his powers only for good. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC .
This article was originally published on MarketIntelligeneCenter.com