Bitcoin – currency, investment or Ponzi scheme

Written by Michael McAlary

There has been a lot of media attention on Bitcoin recently. Many people want to know what it is as they are unclear as to whether it is a currency, a payment method, investment or Ponzi scheme?

About 20 years ago there was early runner of Bitcoin called Digicash. It was electronic “coins” that could be converted to cash, i.e. one Digicash was worth 0.10 cents. The bank promoting this electronic payment tool guaranteed the payment. This provided confidence and assurance in the system. It did not get off the ground for a range of reasons including it was too soon for the market. The major issues identified at that time were credit risk, value, fungibility and legal tender. These are the same issues facing Bitcoin.

So by way of background the Bitcoin concept is not new, but it is missing a number of key elements that make it sustainable. Namely, no bank will accept Bitcoin as payment. If you walked in to any bank today with a certificate for 1000 Bitcoins (even though you may have paid $1,000,000 for the Bitcoins) they would not give you one cent for it. Bitcoins outside the Bitcoin market are not fungible and have no value.

As is reported in the press each day their value fluctuates widely within the Bitcoin market and recently one of the key storage /processing units was hacked, so security is questionable. Until fungibility and value (that are supported by a financial system) are addressed Bitcoin has a limited future life. It just takes a few people to lose confidence in the system for it to collapse. The possible linking to gold, silver, oil, etc could potentially give it value because investors/users will look past the Bitcoin to the underlying physical asset where the value is.

Finally, it is noted that Bitcoin is used by people in the “silk road”, with some senior Bitcoin personnel recently being arrested in Australia and the USA on drug and money laundering charges. Credibility and integrity are paramount principles in business and particularly in the payments area.

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