Perspective on bitcoin

Bitcoin went close to $1000 yesterday. That's about a 50x increase this year. Percentage-wise, it's 5000%! It was a great opportunity to short, because in the short-term, I think this is a huge mania. Even when the Cisco stock went up 100x (or 10000%), it did so over a period of about 10 years. The current bitcoin mania looks similar to the tulip mania in 1637. Anyhow, I promptly shorted bitcoin 2 days ago. Of course, I'm using my speculative account to do this, not my main investment account. I do not understand Bitcoin enough even though I followed it in the past 2 years, so it will not be part of my investment portfolio.

Bitcoin is an amazing money born in the private sector. For me, the best money is made in the market, not by governments or central banks. Wouldn't it be great if this becomes reality?

Unfortunately, history doesn't offer us much hope on this matter. Private, 'virtual' money has come and gone for thousands of years. Whenever it becomes lucrative and becomes a serious competitor to the currencies issued by the government, the government will slap regulations on it or control it. A very recent example is the QQ coin in China, which I doubt many people are aware of. Because the QQ coin got so popular, the government and central bank moved in to limit its use. If my information is correct, QQ coin is now not allowed in transactions of real goods, but are only allowed in transactions of virtual goods such as online-game items.

Assuming that governments and central banks allow competition to their own fiat currency monopolies, Bitcoin faces another headwind in the form of competition. There are already several virtual currencies in existence. What if the costs of mining for other currencies are lower? What if other credible institutions or companies issue their own virtual currencies? If private currencies are allowed to compete freely with central bank currencies, "Facebook" coins can become big quickly and compete with Bitcoin. Or better yet, "Ebay" coins. Ebay sees a huge volume of transactions involving real goods. It will not be hard for people to adopt Ebay's own virtual currency. 

One reason why gold and silver survived competition for thousands of years is because, well, there is lack of competition. Other metals are either too abundant, or too rare, too hazardous, or too reactive.

What will it take bitcoin to be a real currency? It will take a world-wide collapse in all major currencies. It will mean governments repeal their legal-tender laws and allow for competition to their monopoly in the ultra-lucrative currency-issuance business. It will mean middle-aged people like my parents become tech-savvy enough to use it. It will mean people will rather not store their wealth in gold or silver, the traditional haven. All these may happen, but it is very unlikely as of this point in time.

There are lofty predictions that a Bitcoin will be worth $10,000 or $100,000 or $1,000,000 in the future. I don't know. It may or may not happen. All I know now is that this is a mania in the short- to medium-term. Going up 5000% in a year is no laughing matter. In my mind, this rapid rise is caused more by speculators than by people who really want or are desperate to use the coins in daily transactions. There are multi-million dollar funds on wall street that have sprung up to take positions in Bitcoin. But as always, all speculative frenzies will crash in the end.

For Bitcoin proponents, a big and prolonged crash should really be welcomed if Bitcoin is to be a stable long-term alternative currency. Then the speculators will be flushed out. Right now, though, it remains a mania.