SO I was recently trying to figure out why Bitcoins could be considered a rational investment (sorry to bring up that dead horse again =P). Much to my surprise, I realized that reasons for investing in them are much the same as the reasons for investing in gold.
* Relatively stable, predictable supply over time
* Not controlled or regulated by any institution or central authority (government or otherwise)
* Value determined entirely by market
* Will not decay or collapse: you can bury it for 1,000 years, dig it up, and it will be valid and unchanged
* Value not tied to the utility of an underlying asset[1]
For both gold and bitcoins, that last bullet point is both the cause of all their advantages, and the source of all their criticisms. By all rational analysis, bitcoins should be valueless and gold should be much cheaper. They don't do anything but sit there, unchanged. However, this resilience against outside factors is what makes them eligible as an "apocalypse-proof" investment. In order to fully attain this status, they merely need everyone to agree on their status as such, which is circular but nonetheless appears to have happened.
The lack of underlying utility is the criticism that Warren Buffet makes of gold. Fundamentally, there's no reason why we couldn't all wake up tomorrow, think "this is stupid," and stop spending so much money on gold. Bitcoin is 100% speculative. People will need food and electricity tomorrow, but they won't starve for lack of gold nor bitcoins. Yet somehow, gold's value has remained and in fact increased over time.
For my part, I find both gold and bitcoins to be irrational investments and I am annoyed that they cost as much as they do. Nonetheless, other people's actions may make them rational investments.
[1] Technically, there is a physical asset underlying gold with some utility, but I believe its market value is primarily determined by its investment value and not the underlying asset.
In order to fully attain this status, they merely need everyone to agree on their status as such, which is circular but nonetheless appears to have happened.
I'm not so sure that works.
With gold, it was not the case that everyone just "agreed to agree" that it was valuable.
Rather, gold was valued independently of its "investment value" due to its use as a status symbol/decoration/jewelry.
Likewise, because of that, there's no risk of everyone suddenly "disagreeing" that it's valuable, causing a huge collapse.
With bitcoin, it's unclear to me that there is a way to either bootstrap this "agreement" in the first place, or to sustain it.
Glass also has decorative value. There's no easily imaginable risk of everyone suddenly deciding that it has NO decorative value.
So what? That's not the relevant risk. The relevant risk is that whatever you are using as a currency will DECREASE in value. Say, from the level of something highly valued as a medium of exchange accepted everywhere, to the level of a mere decoration. Or from a peak value where you bought in big during a speculative bubble, to a lower value where (yes) it's still worth something, but worth less than if you had kept it in treasury bonds or an index fund or a farm.
The lack of underlying utility is the criticism that Warren Buffet makes of gold. Fundamentally, there's no reason why we couldn't all wake up tomorrow, think "this is stupid," and stop spending so much money on gold. Bitcoin is 100% speculative. People will need food and electricity tomorrow, but they won't starve for lack of gold nor bitcoins. Yet somehow, gold's value has remained and in fact increased over time.
For my part, I find both gold and bitcoins to be irrational investments and I am annoyed that they cost as much as they do. Nonetheless, other people's actions may make them rational investments.
[1] Technically, there is a physical asset underlying gold with some utility, but I believe its market value is primarily determined by its investment value and not the underlying asset.