Tulip Bulbs & Bitcoin
A little history lesson.
Personally, I find nothing more beautiful than tulips in full bloom. Sadly, they don’t last long and perhaps that adds to their appeal. At no time was that love for tulips greater than in the 1630’s when prices for the bulbs soared. At one point, 40 bulbs cost 100,000 guilders. The average skilled worker made less than 350 guilders a year.
Of course, you can probably guess how that story ended.
The value of anything has a psychological component. A high end ladies purse can retail for $1,500, but it’s worth it only if someone is willing to pay that amount. From a functionality standpoint, it’s really not worth any more than the purse sold at Kohls.
Today we have a new type of tulip bulb, one so mysterious we’re not even sure who created it. It’s called Bitcoin, a crypto currency that allows you to buy and sell things without any paper trail.
You can acquire bitcoin two ways:
- Buy some from an existing owner. As of today, it’s worth (fill in amount) for just one coin.
- Mine your own. That’s right. You mine your own bitcoin, but you better be good with computers because the only way to do is by solving very complex computer equations.
The whole idea behind Bitcoin started in 2009 by someone named Satoshi Nakamoto. I say “someone” because no one knows for sure who he, she, or they are. Through the Bitcoin website, coins can be created.
So why would anyone buy it? Great question.
First off, it’s untraceable. You can buy “stuff” with it assuming someone else is willing to exchange their goods for your coins. If you’re in the drug trade, this is a great feature. No banks, no transaction charges, complete anonymity.
Secondly, you assume that over time more and more businesses will accept it, thus increasing its value. And that’s where it gets tricky.
To be a legitimate currency, you need three things:
- It serves as a medium of exchange. While a number of retailers will accept bit coin, they do so only to convert it back to dollars immediately. Think of it like winning a new car you don’t need. Your net worth has increased, but you must convert it to cash if you want to buy anything with your new value. Obviously the bet that Bitcoin enthusiasts are making is that more and more businesses will be accept it.
- It has to serve as a medium of exchange. In other words, goods and services would be priced in bitcoin. They are not. When you buy a shirt at Macy’s, it’s priced only one way:
- It has a reliable stored value. When the Bitcoin song is finally sung, it may be measured as the most volatile “investment” out there. The lack of consistency in its value makes it almost impossible to use as a primary currency.
Right now it’s almost impossible to convince anyone whose made money on Bitcoin that it’s a bad investment. I’ve even see what should be reasonably knowledge people in my industry buy into the myth that “this time it’s different.”
In many ways, the value of any currency is based on a universal acceptance. We know there really is no intrinsic value to a dollar bill. It’s just paper. But we’ve agreed to exchange goods and services for it, and our government regulates its supply.
Eventually, governments will weigh in on this as they see Bitcoin’s popularity to be a threat to their sovereignty. It’s at that point I expect to see no one willing to even sell tulip bulbs for Bitcoin. But, only time will tell.
If you’d like to learn a little more on this and other financial issues, click here to arrange a time to talk.
— Nikki Earley
