Have you got yours? People are making millions!

Some are losing millions, but we don’t hear as much about that in the daily financial news. Cyrptocurrencies are the rage and everyone wants to invest. But do they understand what they are doing?

A few years ago one Bitcoin would buy you a pizza. Now it will buy you a house (admittedly a small one in a rural area). That’s a nice return on investment if you bought early and held on. And if you are able to sell now, which is quite likely given the mania.

I’m not going to go into details of Bitcoin and other cryptocurrencies, what they are and how they work. You can look that up yourself. What I would like to do is address the notion of value.

I do not own any Bitcoin. You may say that is because I don’t understand cyrptocurrencies, but the truth is more that I understand them too well. As an investor I am decidedly risk-averse.

Bitcoin is not really money, much as users try to convince you otherwise. But it functions as such in some segments of society. It has an assigned value and is exchangeable for goods or services. Hmm, maybe it is money, despite its volatility.

It is that volatility that makes it less than useful as currency. Bitcoin seems to suffer from both hyper-inflation and hyper-deflation. Not the sort of thing most of us want to deal with.

We tend to think of money as something issued by governments, though that is a relatively recent phenomenon. Individual banks once issued notes to facilitate trade, with the bank, not the government acting as the clearing house. That was well and good – until the bank failed, which sometimes happened. Then you were left with waste paper.

Government issued money can have the same problem. Every school child learns of Germany’s Weimar Republic of the 1920s, where inflation was so rampant that a wheelbarrow full of cash, millions of Deutschmarks, wasn’t enough to buy a loaf of bread. The economic uncertainty led to the rise of Nazism.

I saw the same thing on a slightly smaller scale when I lived in Liberia The Liberian dollar was pegged to the US dollar, one for one, officially. However, even the government bank wouldn’t exchange the two currencies at that rate – and on the street you could get five or more Liberian dollars for every American one. And that was in good economic times.

When thinking of Bitcoin though, another story comes to mind, from Science Fiction author James Blish. In his novel Earthman Come Home, the entire galaxy goes bankrupt when the currency shifts from metal, germanium, to a drug. Those with lots of germanium on hand were left destitute. Those with teh drugs were rich.

Our economy could collapse if those backing a currency, whether it be Bitcoin, dollars or Euros, suddenly stop backing their money. All currencies are, when you think about it, more of an abstract or idea than something tangible.

Even something like gold, everyone’s favorite hedge currency, only has the value people apply to it. Kind of like Bitcoin.

I’ll stick with government currencies for the time being. Yes, I know they too can be risky. But they are less likely to collapse. I hope.

What about you? Are you investing in Bitcoin?