My Bitcoin Rant

The best aspect of Bitcoin is that it is a free currency, completely outside of the control of any government or central bank.

Funny thing is, the worst aspect of Bitcoin is that it is a free currency, completely outside of the control of any government or central bank.

I’m not the biggest fan of central bankers.  Like the rest of us, they are human and will err.  They are tasked with making critical decisions under conditions of murky uncertainty and face conflicting mandates and political agendas…not to mention the unimaginable stress and the emotional burden of knowing that the livelihood of 315 million Americans depend on them making the right policy decisions.

No one—not Bernanke or Yellen or the quants that Goldman Sachs keeps locked in the basement—is smart enough or has enough information  to effectively manage a currency, which is why central bankers constantly get it wrong.  It’s an impossible job.

But to adapt Winston Churchill’s quote on democracy—that it is the worst form of government except all those other forms that have been tried—I’ve reached the conclusion that the modern central banking system is the worst monetary system ever devised…except for all others that have ever been tried.

The classic gold standard encouraged punitively high interest rates during times of crisis—which is precisely the time when liquidity is most needed—and crucified the working classes on a cross of gold.  It also encouraged mercantilist economics—the scourge that Adam Smith preached against in the Wealth of Nations—which was a leading cause of wars in the post-industrial era.

The gold standard is never coming back.  But what about modern variants like Bitcoin?

At first blush, there is a lot to like.  It has the anonymity of cash.  It can be transferred without the disclosure requirements of the world banking system.  And the creation of new Bitcoins is preset according to an algorithm, making something like an Argentine-style devaluation impossible.

But let’s get serious here.  If your bank fails, you have FDIC insurance in place to protect your savings.  But who do you call when a Bitcoin exchange is hacked or shut down due to a bug? Or for that matter, when someone steals the laptop that was storing your Bitcoins?

Federal Reserve Chairmen are regularly asked to testify before Congress to explain their actions.  And if things ever got bad enough, the Federal Reserve has a physical location that could be stormed Bastille-style with pitchforks. (I’m joking.  Sort of.)   Though imperfect, there is a level of accountability.

But who do you drag in front of Congress when Bitcoin breaks?  Satoshi Nakamoto, the John-Galt-like character (or characters) that created the virtual currency under an assumed name?  Good luck with that.

Look, I don’t trust the government.  I agree with the gold bugs, Bitcoin enthusiasts and other assorted malcontents on that count.  But I do trust the government more than I trust a crypto-currency of murky origins backed by an algorithm that lives in the netherworld of the internet.

I’m not going to wag my finger and tell you not to speculate in Bitcoins.  If you like to trade, and you feel comfortable with the risks involved, go for it.  Had you bought at the right time last year, you could have made more than 10 times your money.

So by all means, speculate.  But don’t drink the Kool-Aid here and buy the ideology.  Bitcoin is a deeply flawed idea, and it is not a viable store of wealth.  I’m not opposed to the idea of a free-market parallel currency, and indeed precious metals have served that role to some extent ever since the fall of the gold standard.  Some future iteration of a Bitcoin-like currency might be a viable option.  But as of today, we’re simply not there yet.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering market insights, global trends, and the best stocks and ETFs to profit from today’s exciting megatrends.  This article first appeared on InvestorPlace.

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  • Ramon

    You still don’t get it.

    > If your bank fails, you have FDIC insurance in place to protect your savings. But who do you call when a Bitcoin exchange is hacked or shut down due to a bug?

    Exchanges aren’t banks; you don’t keep your savings in exchanges. Normal Bitcoin users will never in their life use a currency exchange so this point is simply not relevant. Exchanges are for speculators who already accept the risk of speculation.

    > Or for that matter, when someone steals the laptop that was storing your Bitcoins?

    Bitcoin’s aren’t physical money, a loss of your laptop is not a loss of your bitcoins unless you’re not keeping backups which is stupid. Bitcoins are digital, you can keep multiple copies in multiple locations so that it’s not possible to have your coins stolen. You wallet is encrypted so getting your laptop doesn’t give someone your coins. Restore your offsite or paper backup and you’ve lost no coins.

    Bitcoin is not ordinary money, you need to stop thinking like you think with ordinary money; your fears are based on you not understanding the nature of digital money and the *new* things it enables that simply don’t exist with gold/cash. You can’t keep backups of gold/cash so you need FDIC insurance. You don’t need that with digital money because stolen encrypted wallets are worthless.

    Bitcoin is not an algorithm, it’s a new network on the Internet just like in the 90’s the web was a new network on the Internet. The value of bitcoin is not in an algorithm, it’s in the payment network.