Bitcoins and Hurricanes

Recently, millions of my fellow Floridians did what Floridians do when a major Hurricane is bearing down on them - they all ran to the local grocery store and bought as much water as they could. People lined up at 5 AM to be the first to buy ridiculous amounts of bottled water - so much water that grocery carts were tipping over as they tried to maneuver them to the checkout lines. Stores would run out of water minutes after opening only causing people to turn to social media to either update their friends about the scarcity at one location or seek advice on where else water could be found.

Craigslist was full of entrepreneurial sellers offering 16 oz bottles of water for $2, $3 or even $5 a bottle when a case of 24 usually sold for less than $4/case. Police agencies across the state had to divert officers from disaster preparation to ensure that fights didn't break out over the water. Such behavior wasn't just happening in coastal areas of the state that were expected to suffer widespread damage. Instead, it was happening everywhere, regardless of risk or time until expected impact.

In Gainesville, FL (located in the North Central Florida, roughly 90 miles from either coast) stores were out of supplies a full week before the earliest anticipated landfall.

Did people need that much water (particularly in the center of the state, 90 miles from each coast)?

People were buying water because they saw everyone else doing it and feared missing out. All the local water systems were fully functional, and every one of those people could have filled containers of water from their faucet at a negligible marginal cost. They could have filled bathtubs or gone to any number of stores and purchased clean 5 or 10-gallon plastic buckets with lids for $2 each with no wait.

These acts were irrational; the water had value not because people needed it for something, couldn't readily obtain it or because it was expected to appreciate in value in the future. No, it had value just because people wanted to make sure that they didn’t miss out regardless of the probability of that happening.

This behavior is a lot like what is now going on with Bitcoin and the other cryptocurrencies. Why does anyone need these cryptocurrencies? They are not particularly useful means of exchange. The transactions costs for using them are high. They are not universally accepted. They are not currently functional stores of value given their large prices swings over short amounts of time. They are challenging to safeguard and if stolen, completely untrackable. However, people are readily exchanging real money for these digital bits of data that live in the cloud.

Blockchain technology does offer tremendous potential in the future. But what makes Bitcoin better than Ripple? Ethereum better than Litecoin?

As we know, where supply and demand balance we have a real market price. If we talk about Bitcoin, in particular, the supply side of the equation is very well defined - there will only ever be 21M BTC. 

But other than for speculation, can anyone explain what drives current demand? Just because everyone wants something at this moment doesn’t mean that there is fundamental demand for the item (or an appropriate market price for it). In my opinion, the demand here is based merely on the perceived scarcity. People don't want to be left without if others have bought it.

What stops anyone (or any group) from deciding to start a competing cryptocurrency? Just this week we saw Kodak launch a cryptocurrency for photographers. What if OPEC agreed that from here forward all purchases would have to be in its proprietary "OCoins"? What if Amazon develops its currency? Any or all of these things can happen, flooding the market with new supplies of cryptocurrencies for which there would be a higher demand. 

After the storm risk passed, people were left with large amounts of bottled water, that was worth significantly less than what they paid for it. At least the water had some value. You could drink it over time. I'm not sure that Bitcoin or any of these other cryptocurrencies will have value unless they are the one that prevails. Currently, there are over 1,400 competing cryptocurrencies compared to 180 different paper currencies. A few of these digital coins will survive, but most will not.

Too many people who pour money into cryptocurrencies may wake up like millions of Floridians after Irma and realize that their cryptocurrency is worth far less than what they paid. Some people will have guessed correctly and will make money. Most will not and will lose money. But even those who guessed correctly shouldn't try to justify what they are currently doing as investing. Instead, they are gambling and hoping that they are right.