90.9 WBUR - Boston's NPR news station
Top Stories:
PLEDGE NOW
Economy

Mark T. Williams: Real value is created through meaningful innovation and adoption -- not from smoke and mirror deception. This April 3, 2013 photo shows bitcoin tokens at 35-year-old software engineer Mike Caldwell's shop in Sandy, Utah. Caldwell mints physical versions of bitcoins, cranking out homemade tokens with codes protected by tamper-proof holographic seals, a retro-futuristic kind of prepaid cash. (Rick Bowmer/AP)

Bitcoin is not a futuristic currency but a speculative mania. Greed is pushing prices skyward but fear will quickly bring those same prices crashing back to earth. Investors need to separate the promising technological innovation of digital currency from the Bitcoin Ponzi scheme that will harm those that fail to exit before the bottom falls out.

Bitcoin is another example of “market innovation” that deserves closer scrutiny from the Securities and Exchange Commission. SEC Chairman Mary Jo White has said virtual currency itself may not be considered a “security,” but interest issued or returns gained by it likely would be and therefore subject to regulation. Federal Reserve Chairman Ben Bernanke told Congress that the Fed “does not necessarily have authority to directly supervise or regulate these innovations.” And the Justice Department says Bitcoin is legal, but that doesn’t mean it is adequately market tested, investment safe and ready to be a global currency.

Bitcoin is not a currency with intrinsic value but a hyper bubble fueled by a get-rich-quick mindset.

Asset bubbles have three phases: growth, maturity and pop. Bitcoin was created in 2009, hitting its growth stage in 2011 and maturity stage in 2013. Now it is ready to pop, having reached the nosebleed price of over $1,000, up from $13 since January. In addition to high-tech stocks, Chinese real estate and high-end artwork, Bitcoin can be added to the list of speculative bubbles that will not end well for investors.

Unfortunately, the bubble run-up in Bitcoin and reputational damage will destroy a potential innovation that could have been used for legitimate market purposes. Silk Road, the deep web purveyor of drugs, guns and prostitution was its biggest promoter.  Dangerous price movements — over 5,000 percent increase this year — also hamper its adoption as a trusted currency. Unlike the U.S. dollar, which is backed by faith in the largest economy in the world, Bitcoin has no backing and lacks a stable or predictable price, inhibiting commerce. Placing high risk bets on a fad asset is not for the faint of heart. Compared to other assets, Bitcoin is over 7 times as volatile as gold and over 8 times as volatile as the S&P 500. Recent Bitcoin price movements make owning Zambian kwacha seem boring.

The benefits of digital currency to reduce transaction cost and compete with Visa and MasterCard has real promise for consumers. But to claim that volatile Bitcoin is the currency of the future in its current “Wild West” stage is intellectually dishonest. There are numerous digital currency alternatives evolving including PeerCoin, Litecoin and Anoncoin that are gaining investor interest and challenge the notion that Bitcoin will be the market standard.

Very few credible retail shops even accept Bitcoin which leaves the bulk of interest with speculators. Bitcoin has no underlying value and is simply a digital way to place bets and attempt to capitalize on it by claiming built-in scarcity and hyped demand. In reality, it is a virtual coin created by computer programmers out of thin air. These are computer geeks — not central bankers that understand capital markets and how global economics works. Bitcoin only has value if speculative interest remains. Prices could drop as dramatically as they have risen, inflicting substantial financial losses, causing investors to flee. In the last week, prices have risen by over 60 percent and could easily fall by that same amount or more. Once sellers outnumber buyers, prices will eventually drop below $10, erasing all gains. This price collapse will occur by the first half of 2014.

Bitcoin is not a currency with intrinsic value but a hyper bubble fueled by a get-rich-quick mindset. Can the 12 million digitally manufactured Bitcoins in circulation really be worth $12 billion? If so, why can’t 12 million rare clamshells discovered on a remote island be worth $12 billion? At least with clamshells there is history supporting their use as viable currency.

Recent Bitcoin price movements make owning Zambian kwacha seem boring.

In the last month, Bitcoin has increased over six fold — from $150 to over $1,000 — despite the fact that underlying fundamentals have not changed, nor do they support such lofty prices. Is one Bitcoin mined by a computer really worth the equivalent of close to one ounce of gold? The supposedly maximum number of Bitcoin that will be mined remains at 21 million. Yet these internet coins can also be broken down into almost infinite bite sizes. Skyrocketing prices have increased the number of computers participating in this modern gold rush, raising legitimate concerns about whether existing controls will be adequate to prevent market manipulation schemes.

If Bitcoin is not backed by anything and has no underlying value, why have prices risen to the clouds? Speculators are being sold on hype and recent price spikes have been used to claim this flawed investment premise is rock solid. Real value is created through meaningful innovation and adoption — not from smoke and mirror deception.

In recent U.S. Senate testimony, soon-to-be Fed chief Janet Yellen missed an important opportunity to call out Bitcoin as an example of a dangerous speculative bubble. Smart investors needn’t wait to be told.

Related:

Tags: Innovation

The views and opinions expressed in this piece are solely those of the writer and do not in any way reflect the views of WBUR management or its employees.

Please follow our community rules when engaging in comment discussion on this site.
  • CasualCommentator

    I am amazed at your ignorance. The title Cognoscenti is a misnomer. Good luck

  • pan0ramic

    “Very few credible retail shops even accept Bitcoin ” This is simply not true anymore

  • Bram

    Hahahahahaha.

  • Milly Bitcoin

    A few of your points have some merit as Bitcoin is most likely in a bubble currently but this is on top of a steady increase. You don’t really separate the two and you sprinkle the whole thing with a bunch of hyperbolic statements that shows you have not done your research.

    • John

      I agree with pretty much all of your points, and I think the author is too hyperbolic in his criticisms. I do, however, wonder if Bitcoin will ever receive a critical mass of support from vendors/investors to reach the circulation levels of the world’s major currencies. And a bubble burst could be a huge psychological setback. That said, I admittedly haven’t done as much research on this as I would like…..

      • Milly Bitcoin

        There is defiantly risk. However, what you are looking at now is an experimental protocol. It is like looking at the Internet in the early ’90’s and trying to draw conclusions. It is just too early. Bitcoin bubbles burst all the time so any short term aberrations I don’t see as fatal at all.

        • Joshua Lumley

          Very true, the bitcoin bubble bursts twice a day. (as often as i have sex).

  • Luke Johnstone

    This author is so misinformed. Nay-sayers like this will soon be proven wrong.

  • USDollar Sucks

    “Unlike the U.S. dollar, which is backed by faith in the largest economy in the world…” LOL

    • John

      Care to expound upon that? That is a factually true statement, you know

      • Response to John

        I just think it is funny when talking about stability. The U.S. dollar has been in such flux with the “largest economy” recovering and our government not able to come to any decent agreements that would better our economy. Online currency has a long way to go before it is as stable as our currencies but maybe the fact that the Fed doesn’t want to regulate it will end up being a good thing!

      • Krogoth Alexander

        It’s backed by the threat of war and death nothing else. Iraq wanted to stop selling oil in USD.. do you remeber what happend to them?

  • pmarreck

    So you’re basically saying that both the USD and the BTC are “backed by faith”?

  • Melissa

    I’m not here to defend Bitcoin, and I think the concerns the author raises may have some validity. It is a “virtual” currency, “not backed by anything and [with] no underlying value.” What I’m missing is how that is different from the US dollar, or any other traditional currency. Money of any sort is a collective illusion. It works because we all choose to accept the same belief about it. Its only real value is what we decide to believe it has. When Bitcoin becomes a mainstream part of the monetary illusion, it will be as valid and valuable as any other currency. Which is to say, not very.

  • wobble

    “COGNOSCENTI” eh? My friend you are a joke. So Bitcoin is a “ponzi” scheme? This type of blather was unsurprising a year or two ago, but there is no excuse today. The truth is out there – some people are just too lazy to do their homework.

  • HillSide

    “Bitcoin as an example of a dangerous speculative bubble”? Really? Is Yellen or anyone else like the author doing anything to call out our banks who do this speculation without any oversight or meaningful regulation? Let’s get to the root of our economic problem, not just trash a virtual currency. This article is laughable. Smoke and mirrors to avoid the true economic problems of our institutions.

  • mzelicskovics

    “Real value is created through meaningful innovation and adoption” yeah and that is what Bitcoin is. You really have no clue what you are talking about.

  • mzelicskovics

    Mark T. Williams teaches finance, risk management and capital markets at Boston University School of Management and is a former Federal Reserve Bank examiner. And also knows absolutely nothing about Bitcoin.

  • kgmiller

    Mark – here’s an excellent Khan academy tutorial which explains how Bitcoin actually works. You really have to have an understanding of the tech to have a grasp on the new kinds of things it facilitates. Unseating Visa and Mastercard? — well, yeah, sure. But that’s just the beginning of what’s possible when you fundamentally re-think how a “currency” could operate given the state of technology today. Bitcoin is not going to follow previously established economic models. Bitcoin is not going to fall in-line with easy comparisons and analogies. This is something history has not seen before…this is something history could not see before. You and your sword wielding colleagues of similar mind are mocking the first musket. https://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking/bitcoin/v/bitcoin-what-is-it

  • http://profiles.google.com/barry.kort Barry Kort

    See Mathematically Defined Crypto-Currencies for another perspective.

  • btc

    Bitcoin will never be used as a currency, it will end up acting more like a commodity. Because it is inherently deflationary, it is more accurate to think about it as similar to gold, and soon there will be no more gold to mine. It’s here to stay but it will never be used for day to day purchases by consumers because why spend when it is worth even more next week because of extreme scarcity? People don’t go around paying for things in gold either.

    • Krogoth Alexander

      When people stop accepting paper for wealth.. that might change.

  • ActualAdvice_BTCe

    “If so, why can’t 12 million rare clamshells discovered on a remote island be worth $12 billion?”
    yeah, maybe if you could send 200 million USD worth of clam shells through the internet for 37 cents. Or maybe if clam shells were divisible down to 8 decimal places. Or maybe if clam shells could not be counterfeited and every clam shell transaction is posted in a ledger online thats double checked by clam shell owners world wide. As an economist, your econ is fine. But you clearly have no clue how bitcoin works. Shameful.

  • Joshua Lumley

    This article was written in a negative mindset. Weather it succeeds for fails doesn’t the author regard bitcoin as a thing of interest and beauty? Am emergent technology unthinkable only 10 years go.

  • Jeff Thompson

    Looks like you left out the part where Ben Bernanke talked about Bitcoin’s positive potential.

  • Ray

    Inflation is simply a rise of prices over time, which is generally the result of the devaluing of a currency. This is a function of supply and demand. Given the fact that the supply of bitcoins is fixed at a certain amount, unlike fiat money, the only way for inflation to get out of control is for demand to disappear. Temporary inflation is possible with a rapid adoption of Fractional Reserve Banking but will stabilize once a substantial number of the 21 million “hard” bitcoins are stored as reserves by banks.

  • ronreiter

    Mark, Bitcoin’s value is a bubble and it has risen to such high numbers because people believe in it. Right now, it’s just a proof-of-concept, but the value of Bitcoin is real because it is being continuously adopted, unlike what you said.

  • MikeLaBonte

    The general trend of comments here seems to be that yes, Bitcoin is in a bubble, but Williams provides nothing but misinformation in comparing it to the U.S. dollar. I agree. USD inflation is reflected in the Consumer Price Index chart https://upload.wikimedia.org/wikipedia/en/e/ef/USACPI1800.png, where we see that inflation historically has been a temporary artifact of wars. The 1940 CPI was about the same as 1800! Then we had Bretton Woods in 1944 and the gold standard dropped in 1971. The CPI never settled back after WW2 and in fact the curve now looks like it’s ripe for … a bubble. Go ahead and criticize Bitcoin, just leave out the misinformation about the USD and its “real value”.

  • OTim

    Amazingly the author knows what the price will fall to and when! Hey also learn to use the word “who” on ocaasion instead of “that” when making your irresponsible predictions. Someone is a short seller!

  • Christina

    I agree with the author. The US dollar has no worth, it is a piece of paper. Bitcoin has no worth, it is virtual. There is one key difference: there is no country or banking authority regulating Bitcoin however the dollar is backed by the promise of the US government that it has value. We accept the belief that the dollar has worth because the US government stands behind it. Who stands behind Bitcoin? Money is based on trust and Bitcoin’s proponents don’t trust fiat currency.

  • satoshi

    if you want to weight the valeu of bitcoin. This of it like an enterprise, ok? Now imagine an enterprise that has thousands end thousands of tech employes spread all over the world, working for the network. Now imagine this network has the power of many many teraflops of precessing power, equal to 500top world ultracomputers togheter. Now accept that this eterprise has got a technology that is more secure, faster and cheaper than visa, mastercard and paypal althogheder. Now divide the value of this enterprise by 21 milions (the number of total units of bitcoin that will ever exist). Well, then you will get the minimum price of each unit, and thats not a bubble at all. Think again how much such an enterprise would value? Today this “enterprise” is only 4bi. Thats too cheap, and thats not a bubble at all. I gotta tell that dollar is a bubble, because its value it pure speculation, I gotta tell you, it is not the price of bitcoin that is going up, it is the price of dollar, in relation to bitcoin, that is going down.
    Turn the page, whats next?

  • pj

    Hahahhahahahahahaha. I bet 2BTC or 1600 USD with the author BTC will not fall to $10 in first half of 2014. Many things he say is not true. BTC bubble has “popped” more than 4 times. I think USD will pop soon bc nobody knows how to end QE.

  • The Bitcoin Artist

    “Once sellers outnumber buyers, prices will eventually drop below $10,
    erasing all gains. This price collapse will occur by the first half of
    2014″ ….. really ? ?

    .
    @pj I too have ‘challenged’ Mr Williams – in print – to ‘put his money where his mouth is” ! . – I suggested half my salary 2013 against half of his, that Bitcoin would be trading nearer to $1000 than $10 on MtGox by 1st May 2014 .. so far he has steadfastly refused to even answer my proposition

    I note he is a “specialist in Risk Management” .. or ‘chicken’ as most people call them !

    • Benny Suavo

      …and Mt Gox is gone. I guess you lose.

      • @Bitcoinrat

        bitcoin is not MtGox ! … and bitcoin is currently trading at an average of $632 across all the exchanges . ( date 12 march 2014 )

        In the last month bitcoin has been remarkable stable ( was trading at $654 one month ago , now its at $632 – thats a 30 day movement of less than -0.4% )

        There is no chance that we will see a drop to $10 is the next 3 months – unless mark Williams is privy to insider information on a Govt (JPM encouraged) huge secret dumping campaign ?

        As for volatility – For a comparison against bitcoins 0.4% –

        Share price of Rolls Royce PLC over the last month fell from £1210 one month ago to £1052 today – thats 13% down

        Share price of General Motors – over the last week ( 7 days ) has dropped 6%

        Share price of Apple between 27th Jan and 30th Jan 2014 fell 9.2%

        I could go on ! !

      • Krogoth Alexander

        Hey BUDDYYYYYYYYYYYYY what’s the price of Bitcoin?

    • @Bitcoinrat

      There is more to come out soon about Mark Williams .. watch this space ! !

  • Me

    Wow this article is stupid xD

TOP