Bad Idea of the Year: Put All Your Savings into Bitcoins

Richard Falkvinge, who describes himself as "the founder of the first Pirate Party and is a political evangelist, traveling around Europe and the world to talk and write about ideas of a sensible information policy," blogged about his mind-bogglingly insane idea to put all his savings into Bitcoins.

Not only that!  He is also putting all he "can borrow" into Bitcoins!

Well, when people start doing insane things like Mr. Falkvinge, you have to wonder whether Bitcoins are at a peak in terms of price.  Now, I agree with Mr. Falkvinge that Bitcoins are really cool, and they could revolutionize the world financial systems.  However, at this point, it is certainly not "guaranteed" that they will, and there are a whole host of reasons why this might actually not come to pass.

At this point, I think it is fair to say that there is a "chance" that Bitcoins will succeed.  But there is also significant reason to be concerned that in the future (maybe the near future) Bitcoins will turn out to be a complete failure and become virtually worthless.  The point is, nobody knows.

But Mr. Falkvinge is committing a huge error by converting his savings to Bitcoins and buying them with all he "can borrow."

Let's look at it this way.  Even if everything Mr. Falkvinge says comes true about Bitcoins, and they continue to go up in value parabolically, what is the point of what he is doing?  If he is right, he would still do fine if he put 1/3 of his savings into Bitcoins and did not buy them with debt.  If Bitcoins go up 1000% or more from their current price, which is what it seems he is expecting giving the tone of his post, he should be rolling in dough if he puts 1/3 of his savings into Bitcoins and buys none with debt.

But what if his rosy scenario does not come to pass?  What if tomorrow morning the US government shuts down MtGox and the value of Bitcoins crashes to virtually worthless?  What if next week a competing crypto-currency is unveiled with all the advantages of Bitcoins, and even some additional ones, like corporate or government backing, greater security features, etc.?   Certainly could happen.

Even if Mr. Falkvinge is 99% convinced that he is right about Bitcoins, his bet is still a terrible one.  If the 1% disaster comes to pass, he will be virtually wiped out, and for no reason!  He could have made a similar bet on Bitcoins future without risking his entire financial stability.

The only situation in which his idea actually makes sense?  If he is not serious, invested a reasonable sum in Bitcoins, and is just trying to dupe the next round of bagholders into buying in to the system to increase the value of his holdings.  Really, it's hard to say which is worse, that he really is so crazy, or that he is an evil scheming genius...

But either way, hopefully nobody is taking his advice.