Cryptocurrencies

I am usually an early adopter when it comes to technology. Ever since the iPhone 3, I have always been able to get my hands on the new phone on launch day. I started using ebay before it became popular - in fact, I was already playing with the early text version of the internet in my youth before it became the way it is today.

Naturally, with all the publicity given to cryptocurrencies, I have been toying with the idea of investing in it for some time now. To date, I still haven't taken the plunge, mainly because of ... well, education.

While it is clear that some people have made money from investing in cryptocurrency to date, I simply have trouble understanding how the value of, for instance, bitcoin reconciles with the value of goods and services that can be exchanged with the currency.

Also, I can't understand how the currency can meet our needs in the real life economy - as we produce more value in the economy, the currency supply needs to expand with it (simply because the currency is now supported by more real value created) but I understand that the maximum bitcoins that can be issued is $21 million, so I don't understand what would happen when we reach that figure. If the currency is artificially constrained, then the price of the currency will of course rise but that would then decouple the currency from the underlying real value of goods and services in the economy. 

The only way I can see any digital currency working well at a global level (rather than just speculative punting as people are currently doing with cryptocurrencies) is if we, as a global collective, do the following:

1. Remove the ceiling of how many bitcoins can be issued; and

2. Freeze all the world currencies at an agreed 'strike time' and issue bitcoins to everyone person on the planet to reflect the value they each hold at that time so that their bitcoins after the worldwide issue will equate the proportionate value they hold in the global economy.

Otherwise, I have trouble not seeing cryptocurrency as some form of Ponzi Scheme where someone might profit along the way but that is at the expense of others who put money into it but will lose money at some point when the music stops. Then again, perhaps my thinking is flawed because of my education and I am simply not seeing the bigger picture or being able to exercise lateral thinking.

PS Further thoughts - In my opinion, the only reason why bitcoin is going up in value is because someone else is willing to pay a higher price for it. I struggle to understand why other than the fact that people are sucked into this FOMO mindset at the moment, so they are pouring more money in as we speak without understanding the economics behind this supposed asset class.

If you look at what each bitcoin can buy now, its purchasing power is far less than its cost and the premium people pay must therefore be attributable to something else other than its purchasing power.  And it's most certainly not an income stream - you can't earn any income from holding bitcoins like you would with traditional investments. The only thing I can think of is the belief that bitcoin may be seen as a safe storage of value. But is that true? All it takes is for people to start thinking that the premium paid is not commensurate with the cryptocurrency's ability to store value and the premium will vapourise as quickly as its rise in value.

In the end, I think the bitcoin will only be worth what it can buy, unless there is no alternative safe storage of value (which would require the monetary system to break down globally - even then, there may still be other safer storage of value such as gold and silver).

If I am not as financially conservative as I am, I'd probably short the bitcoin.