When you own a digital currency, what do you own? You own a digital certificate, no different than a piece of paper. There is nothing preventing there from being more made. Yes, I know that the largest of the digital currencies- Bitcoin- has a limit of 21 million units.
With that being said, here are the reasons why digital currency is a bad idea:
- It has no intrinsic value. You can’t eat it, wear it, or heat your house with it. Unlike gold — which at least feels nice and looks shiny on your spouse’s ring finger — you can’t even see Bitcoin.
- It is not a productive asset. It’s not a factory that produces an item. It’s not a field that produces cucumbers. It’s not a firm that offers a service. It contributes nothing to society.
- It has zero underlying value. None. It’s not backed by land or commodities or — as with national currencies like USD or GBP — the threat of violence
- It has minimal utility. Because the price fluctuates so wildly (what healthy currency doubles in a month?), it’s virtually ineffective as a safe representation of value or means of trade.
- Its value is solely derived from the trust that the price will continue to rise indefinitely. That there will always be new investors to buy out the old ones.
This makes it no better than owning paper gold. It’s mathematically impossible for Bitcoin to grow forever, this can only have one final outcome: A Black Swan event causes its demise as an investment. Perhaps a superior cryptocurrency makes Bitcoin as irrelevant as the Model T versus a Tesla. Perhaps nations or groups of nations make a concerted effort to destroy Bitcoin, or more likely, Bitcoin owners. Or maybe Bitcoin simply levels out when it reaches max coinage, shedding its identity as an investment and becoming a stable trust-based currency. In doing so, it will drive away all the exuberant speculators who are currently propping up its inflated price. No matter how it happens, at some point, millions of Bitcoin investors are going to lose billions of dollars.