David Chaplin 's Opinion

A personal finance columnist for the NZ Herald

Inside Money: Coining it - bitcoins and pieces

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Since my last, and first, foray into the world of bitcoin the story has gained further currency.

Media interest spiked last week in line with the rocketing bitcoin price, which reached as high as US$238 last week before dropping back considerably.

As I write bitcoin is trading at just under US$70 - still impressive enough considering it was at about $9 at the time of my column last June.

But somehow I'm not excited: perhaps because I didn't buy any last year; although really it's because I don't buy the story.

I don't trust software developers any more than central bankers despite the anonymous bitcoin originators claiming the system has eliminated the need for trust in money.

Even so, bitcoin is certainly ingenious (or otherwise so difficult to understand it must be brilliant) and might be useful in some circumstances.

This article by Christopher Mims in Quartz is one of the most clear-eyed I found on the current bitcoin phenomenon.

Under the great title 'Now is the time to gamble on bitcoin', Mims reviews the case for getting a bit of the mathematically-derived coin for investment purposes. The emergence of famous losing pair, the Winklevoss twins (sixth in the 2008 Olympic rowing doubles, second in the race to create a globally-successful social networking site), as big bitcoin investors added celebrity interest to the story.

"To the extent that bitcoin is a Ponzi scheme, dependent on ever more fools to buy into it in order to provide early adopters with profit, this is perhaps the most important reason why the value of bitcoin could continue to appreciate," Mims writes. "Indeed, the Winkelvoss twins are explicit that this is their bet, too."

Economist Paul Krugman, writing in the New York Times (via the Sydney Morning Herald ), doesn't tackle the investment case but he does draw an interesting parallel between the romantic monetary longings of gold fanatics and the bitcoin believers (whom he dubs 'bitbugs').

"Goldbugs and bitbugs alike seem to long for a pristine monetary standard, untouched by human frailty," Krugman says. "But that's an impossible dream. Money is, as Paul Samuelson once declared, a "social contrivance," not something that stands outside society."

And if I had a bitcoin for every time I've heard that, there's a probability between 0 and 100 that somebody would be getting rich.

David Chaplin

A personal finance columnist for the NZ Herald

David is a freelance journalist who has covered the financial services business on both sides of the Tasman for over 15 years. David has edited magazines and websites for the financial advice, investment and superannuation industries. Today, he contributes to various publications in Australia as well as his bi-weekly blog for the NZ Herald under the 'Inside Money' banner.

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