The Problem with Bitcoin

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For a currency to work there must be trust. With nothing backing it, why trust Bitcoin?

One of the supposed advantages of using Bitcoin as a currency is that it is free from government manipulation. This is in direct contrast to national, government-backed currencies, which are subject to manipulation and regulation. For the most part it is this government backing which helps to establish trust in a currency by those people who use it.

For something to be used as a currency, there must be a significant number of people who believe that it can be used as a currency. In other words, there must be trust in the currency otherwise people will not use it.

A lot of people do believe that Bitcoin is a currency and treat it as such. However, Bitcoin has no backing. So, what would happen if its uses were curtailed by government regulation and/or people ceased to trust it and found a more convenient form of currency? It would lose its value completely and become worthless.

Bitcoin is in effect simply a modern version of the Dutch Tulip Bubble where the price of tulips went mad due to excessive speculation and crashed spectacularly due to over-supply. (see https://en.wikipedia.org/wiki/Tulip_mania )

While our trust in national currencies may be limited to our trust in governments, government backing helps provide trust in the system.

Unlike previous currencies such as salt and gold which were only useful because they had other, secondary uses which helped to sustain their value, today a national currency holds it value simply because the government guarantees it. Even though some governments seem unable to keep their currency stable, even a little government backing is better than no backing it all.

For a currency to work there must be trust. With nothing backing it, why trust Bitcoin?

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