I've written many articles on the Bitcoin, my first on Seeking Alpha was way back in early April 2013. In each of those articles I repeat warnings that the Bitcoin is a bubble and that it has inherent design flaws that will prevent it from ever allow it to fulfill its goal as a currency. The Bitcoin isn't designed to be a currency, it is designed to be a bubble forming speculative investment. The performance of Bitcoin has done nothing but prove me right since I first started writing about it. It has created a bubble of all bubbles, a bubble for the record books...all by design.
This graphic from a Payden & Rygel commentary highlights the Bitcoin's fatal flaw. Over time, the supply of currency must grow with an economy or it becomes deflationary. Gold, while an imperfect currency, at least was semi-elastic, and inconsistently grew with the economy. As gold was in short supply, prices would fall, an ounce of gold would buy more goods and services, people would be incentivised to leave their productive jobs and dig up more gold. More gold would be discovered, gold would become inflationary, an ounce of gold would buy fewer goods and services, people would stop digging for gold and return to productive jobs. At least the gold standard had an imperfect mechanism to counter deflation. The Bitcoin is 100% unconcerned with deflation, it is designed to create it. Unlike gold, after a certain point, you won't be able to "dig up" more bitcoins like you could with gold. Deflation is a permanent and intentional outcome of using the Bitcoin. Free markets collapse under deflation. Delcation is an economy killer, and the Bitcoin is designed to be deflationary.
The other thing that I warn about in all those articles is that once a better mouse trap comes to market, Bitcoin will be forgotten. There are no barriers to entry to this virtual currency concept, in fact many of them are already competing to topple the Bitcoin. I often refer to Bitcoin as a beta test, or Virtual Currency 1.0. Yes, there are many innovative advancements in the Bitcoin, but the Bitcoin is still a first stab at the problem and it has extreme design flaws. Because of those design flaws the Bitcoin's life is limited, but unlike a software upgrade, when the Bitcoin killer comes to market, there will be a rush to exit the Bitcoin, and if you aren't first in line at the Bitcoin Bank, you are almost certain to lose 100% of your money saved in Bitcoins.
Unlike "It's a Wonderful Life" when the community comes together to save a failed bank, there will be no rescue of the Bitcoin depositors, there won't even be a Mr. Potter to offer desperate Bitcoin owners $0.10 on the $1.00 for their Bitcoins. When Bitcoin dies, it will die hard and fast, and the exit window will exist for a very short period of time. Bitcoin is a game of high stakes musical chairs, and once the music stops, if you can't find a "greater fool" to buy your Bitcoins, you stand to lose 100% of the value in your Bitcoins. It isn't a matter of if, it is a matter of when.
Most of my articles highlight just how easy it is to develop a virtual currency far superior to the Bitcoin because the Bitcoin has intentional design flaws. I did this because I thought a better mouse trap would be the way to slay the Bitcoin. It was to my total amazement then when I saw the headline "Apple Declares War on Bitcoin." Never in my life did I see that one coming. The king of Silicon valley is eating one of its own. This is one of the all time "Et tu Brute" moments in Silicon Valley history. VC investor Marc Andreesen just wrote an Op-Ed in the NYTs touting the Bitcoin, and proudly announcing that he has invested just under $50 million in Bitcoin ventures. Personally I found that odd that someone would invest so much money is such a flawed product with so much potential for destruction. Silicon Valley has the reputation of creating wealth, not products designed to destroy it.
While my "better mouse trap" theory may eventually be proven correct, Apple (NASDAQ:AAPL) is exploring the "iMoney" concept, the real shocker was that Apple kicked a Bitcoin app off its app store. This triggered an uproar from Bitcoin fanatics, some who even resorted to using their iPhones in target practice as a sign of protest.
Bitcoinmagazine notes that Apple could well have designs on the virtual currency space itself, having previously filed a patent for something called iMoney - which describes both a virtual currency and a digital wallet. Could it be that this is the real reason behind Apple's move?
While the entire title of the article is "Apple declares war on Bitcoin, but it's a war that it's destined to lose," it is entirely wrong. AAPL will win the "war" against the Bitcoin, that is for certain. AAPL would have won the war against Bitcoin even without firing a shot. AAPL will win the war against the Bitcoin because the Bitcoin is designed to defeat itself. For proof of this theory simply go read the article. The article has a real time graphic of the Bitcoin on it. Currently it is showing the Bitcoin down over 24% in the last 7 days. Talk about not seeing the forest through the trees, the Bitcoin believers are just oblivious to reality. No "currency" that can lose 24% in 7 days will ever be widely accepted as a currency, never.
To make matters worse, Bitcoin supporters promote it as a savior to the Third World, bringing low cost banking to the very poor. Trust me, you aren't doing anyone any favors by selling them the Bitcoin concept as a way to save 2 or 3% on transactions, only to have them lose 24% in conversion costs. Imagine buying something from a single mother of 8 children living in an impoverished town. You paid her with Bitcoins just 3 days ago, but she doesn't have a computer or smart phone, she can barely afford to feed her children. By the time she can convert the Bitcoin to local currency, she has lost 24% on the deal, and her children go hungry. In reality, she would be one of the lucky ones, she only lost 24%. Eventually the day of reckoning will come and those who own Bitcoins will lose 100%. I'm pretty sure AAPL is aware of that, and wants no part of it.
Many people in Silicon Valley send money back to their families overseas, they are certain to be aware of this problem. While I have no proof of this, my bet is most money transfers from Silicon Valley are done the old fashion way using banks, Paypal (NASDAQ:EBAY), Western Union (NYSE:WU) or simply mailing cash. I doubt that many people with the intelligence to hold a job in Silicon Valley would ever take the risks inherent in the Bitcoin when dealing with their own family's money. A 24% loss in a week can leave then starving. I doubt many programmers in Silicon Valley ask to be paid in Bitcoins. It is hard to budget for a mortgage payment on a mansion when your income can be cut by 24% is a week.
My last article on Bitcoin described how Bitcoin was creating a tail wagging the dog scenario, where merchants were rushing to figure out how to adjust their systems to accept the Bitcoin. The Bitcoin's inelastic and highly volatile nature prevents it from ever being merchant friendly, so why bother? No merchant that wants to stay in business long would ever accept a "currency" that can lose 24% in a week and can't be used to pay taxes. Most merchants, and all major merchants, that accept Bitcoin today immediately convert it to local currency. Merchants simply aren't interested in currency speculation, and the Bitcoin will always be highly speculative.
The obvious solution to the Bitcoin problem is for merchants to develop their own virtual currency that addresses their needs. AAPL appears to be doing just that. AAPL has filed a patent for iMoney. Unfortunately from the article there aren't many details into the actual mechanics of iMoney, but if it is intended to be merchant friendly which I am sure it is, it is 100% certain to maintain a stable value against its local currency. iMoney will be designed to ensure that it will never lose 24% in a week, merchants won't need to rush to convert it to local currency and all the good things that are in the Bitcoin will be copied over to iMoney. AAPL will throw out the dirty Bitcoin bathwater and keep the baby. AAPL or somebody will design a new and improved Bitcoin, and once they do, the Bitcoin will join the floppy disk in the trash-pile of obsolete technology.
In conclusion; when the most innovative and powerful technology company in Silicon Valley is rejecting the Bitcoin, people considering embracing the Bitcoin should sit up and take notice. When the Bitcoin becomes obsolete it won't be like losing the $5 you have invested in a floppy disk inventory, it will be like having your bank account hacked. It will be like identity theft. It will be like being robbed blind. It will be like you were virtually mugged. Unlike the movie "Its a Wonderful Life" there will be no happy ending. No loving community will rush to the rescue and refill the empty and worthless Bitcoin wallets, there won't even be a Mr Potter offering $0.10 on the $1.00 for your Bitcoins, your bitcoins will be totally worthless, and what ever value you had in them will be lost. The days of the Bitcoin are numbered, and people holding Bitcoin should consider AAPL's actions as a shot across the bow.
Disclaimer: This article is not an investment recommendation or solicitation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. Full Disclaimer and Disclosure Click Here.