If I have funds in a bank account, I know that I have a certain amount of
fiat money available in that account, upon which I can draw more or less
freely, according to the nature of the contract between myself and the Bank.
The value of my account depends upon the value of the fiat money which it
represents.
Bitcoins have no stated value. I cannot know the total value of
my Bitcoins, until the moment I have exchanged all of them for a quantity of
fiat money.
At present, the owner of 1,000 Bitcoins thinks that he is the owner of
over $4 million dollars. But he is mistaken; he will only have $4+ million
dollars when he has sold them all for $4+ million dollars.
I cannot use Bitcoins to purchase anything directly from just anyone;
in order to purchase something with my Bitcoins, I have to find someone who
will accept them in payment of what I wish to acquire, and for which that
person is willing to accept Bitcoins in exchange.
In such a theoretical operation, both the person who tenders Bitcoins in a
purchase, and the person who accepts Bitcoins in a sale, are both of them
calculating their exchange in terms of fiat money, not in terms of Bitcoins.
Thus the Bitcoin has no independent existence such as fiat money has.
Its worth depends on the existence of fiat money in which to transact
exchanges.
As long as there are more buyers of Bitcoin, than sellers, the
value of the Bitcoin will continue to rise, and that will bring in still more
buyers and its value may rise to the skies
But when the moment comes - as it must - when there are more sellers
than buyers, then the value of the Bitcoin will fall; when the holders
of Bitcoins begin to see a trend to falling value, there will be nothing and
no one to stop the trend: owners of Bitcoin will rush in panic to sell their
holdings - to other holders of Bitcoins - before its value falls further.
With more and more owners trying to sell, there will soon be no buyers:
no one will want to catch the falling knife! The value of Bitcoin will fall
to practically zero. When the famous Tulip Craze of the 1600's was over, the
losers at least had their tulips to look at.
The Bitcoin rise in "value" that took months - or perhaps years
- to take place, will be over in a question of hours.
The Bitcoin will become a history of mass speculation that came to grief.
Charles Mackay said long ago: "Men, it has been well said, think in
herds; it will be seen that they only recover their senses slowly, and one by
one"
In the special case of the Bitcoin, sooner or later owners of Bitcoins
will "recover their senses". But it won't be "slowly"!
