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Should You Invest in Cryptocurrency?

An investment is something that has intrinsic value, not speculative value. Photograph: Anadolu Agency/Getty Image

“A collective insanity has sprouted around the new field of ‘cryptocurrencies’, causing an irrational gold rush. I know you’re tempted, but don’t be a fool” a paragraph of an article, which appeared some weeks back.

I’ve been hearing this talk about cryptocurrency for almost two years now and honestly, my initial reaction was “oh great, another gimmick for us to bury our heads in”. Clearly, I wasn’t certain of what this new type of currency the entire world was going nuts about was.

My curiosity kept mounting as I kept bumping into article after article on this mysterious currency and it was last Sunday that the strangest thing happened. While casually glancing at my facebook news feed I came across a rather interesting article well, it seemed more of a testimonial to be honest, than an article, Mel Gibson was being interviewed by this bloke who kept probing about his ‘newfound wealth’. The bloke’s a movie star, sure he’s wealthy, no big deal, right? What’s strange was despite Mel Gibson seeming to converse we can’t really hear anything he says, instead, we see highlighted text appearing on the screen and it seems like part of a Sean Connery movie. It seemed so conspicuous that it actually says “this information may not be available to you for long as banks are fighting hard to stop bitcoin usage”. Bingo!!! From my past experience any commercial or story that says “this information won’t be online for too long” is a major scam alert. Below that, a close friend has supposedly endorsed the usage of Bitcoin. Don’t get me wrong I am not implying that Bitcoin is a scam by any stretch of the imagination. I am sure plenty of people out there may have many a fortune by trading in it. I am just saying it’s just too good to be true.

Let’s face it, though cryptocurrency has sprouted around causing an irrational gold rush worldwide is it really an investment? Infact the only reason people invest in cryptocurrency is because they feel they could sell it for a thumping price later on.

If you do actually make a purchase of this kind, what you’d end up doing is hoping and speculating that the trade value would not decline. This is not a useful activity. You’re playing a psychological, win-lose battle against other humans with money as the sole objective. Even if you win money through dumb luck, you have lost time and energy, which means you have lost in reality.

Warren Buffett

Bitcoin and cryptocurrencies ‘will come to bad end’, says Warren Buffett

 

When we consider an investment the general notion that comes to mind is an asset or equity that appreciates in value, such as a profitable business or a rentable piece of real estate, for an extended period of time. An investment is something that has intrinsic value – that is, it would be worth owning from a financial perspective, even if you could never sell it.

With, however, it’s a different story. Despite it becoming substantially huge in a short span it isn’t really a feasible investment and here’s why.

Bitcoins use an underlying technology called “blockchain” from the mania of people turning bitcoin into a big dumb lottery. Blockchain is simply a nifty software invention (which is open-source and free for anyone to use), whereas bitcoin is just one well-known way to use it.

Blockchain is a computer protocol that allows two people (or machines) to do transactions (sometimes anonymously) even if they don’t trust each other or the network between them. It can have monetary applications or in sharing files, but it’s not some instant trillionaire magic.

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As a real-world comparison for blockchain and bitcoin, take this example from the blogger The Unassuming Banker:

Imagine that someone had found a cure for cancer and posted the step-by-step instructions on how to make it online, freely available for anyone to use.

Now imagine that the same person also created a product called Cancer-Pill using their own instructions, trademarked it, and started selling it to the highest bidders.

I think we can all agree a cure for cancer is immensely valuable to society (blockchain may or may not be, we still have to see), however, how much is a Cancer-Pill worth?

Our banker goes on to explain that the first Cancer-Pill (bitcoin) might initially see some great sales. Prices would rise, especially if supply was limited (just as an artificial supply limit is built into the bitcoin algorithm).

According to leading bankers, Bitcoin has become somewhat a massive bubble, which could explode at any time. Harping on the basic exploitable human values such as greed, fear of missing out and making a fortune in a short span have been misleading factors behind its marketing.

Since the formula for this magic ‘money-making’ scheme is open and free, other companies have seized the opportunity at launching their own version of cryptocurrencies.

Now imagine everybody producing their own version of cryptocurrencies to the extent of charging $20,000 for each coin and continuing to fluctuate, seemingly for no reason. Newspapers start reporting on prices daily, triggering so many tales of instant riches that even your barber and your massage therapist are offering tips on how to invest in this new “asset class”.

Instead of assessing the situation properly many start investing in this currency until its valued as one of the most ‘valuable’ things on the planet.

That is what’s happening with bitcoin. This screenshot from coinmarketcap.com illustrates this real-life human herd behaviour:

“Damn” is the only thing that comes to mind.

you’ve got bitcoin with a market value of $238bn, then Ethereum at $124bn, and so on.

The imaginary value of these valueless bits of computer data represents enough money to change the course of the human race, for example, eliminating poverty or replacing the world’s 800 gigawatts of coal power plants with solar generation.

Bitcoin (AKA Cancer-Pills) have become a bubble enriched propelled by basic human behaviour of greed, fear of missing out, and a lack of understanding of past financial bubbles amplifying it.

The best way to comprehend this madness is to delve as to why this form of currency was invented.

In 2008 an anonymous developer under the pseudonym Satoshi Nakamoto published an online document.  Satoshi seemingly a software and math expert clearly described the architecture and mechanism of the project. His theory was to ensure the currency remains independent devoid of users’ respective government or bank interference.

Bitcoin is a bubble, but the technology behind it could transform the world

 

Will Hutton

Will Hutton

This financial libertarian streak is at the core of bitcoin. You’ll hear echoes of that sentiment in all the pro-crypto blogs and podcasts.

The sensible-sounding ones will say: “Sure the G20 nations all have stable financial systems, but bitcoin is a lifesaver in places like Venezuela where the government can vaporize your wealth when you sleep.”

The harder-core pundits say: “Even the US Federal Reserve is a bunch ‘a’ crooks, stealing your money via inflation, and that nasty fiat currency they issue is nothing but toilet paper!”

It’s all the same stuff that people say about gold – another waste of human investment energy.

Government-issued currencies have value because they represent human trust and cooperation. There is no wealth and no trade without these two things, so you might as well go all in and trust people.

The other argument for bitcoin’s “value” is that there will only ever be 21m of them, and they will eventually replace all other world currencies, or at least become the “new gold”, so the fundamental value is either the entire world’s GDP or at least the total value of all gold, divided by 21m.

An electronic signboard of a Bithumb cryptocurrency exchange in Seoul, South Korea. Photograph: Yonhap/EPA

Many who use the currency tend to think that it is severely undervalued and want it to be a globally recognized currency.

Then again you could say the same about any other product or commodity even my shoes, they may have no intrinsic value but they’re in limited supply so let’s use them as the new world currency.

If Bitcoin were to be recognized as an acceptable currency, then it would need to fulfil several categories:

  • Easy and frictionless trading between people.
  • Accepted as legal tender for all debts, public and private.
  • A stable value that does not fluctuate (otherwise it’s impossible to set prices).

Unfortunately, Bitcoin fulfil none of these categories and safely storing it is also a challenge. Bitcoin exchange traders such as Mt Gox, Bitfinex and wallets have reported being hacked.

Bitcoin will only be valuable if it becomes a critical world currency. In a nutshell if one truly needs to purchase items then you’d need to buy coins from another trader to finalize your transaction. So, the price of a Bitcoin depends entirely on speculators who ironically drive up the price.

A speculative digital currency carries value only when cashed out to physical currency. So theoretically you’d basically be at the same place where you initially started off when you invested in the currency in the first place. The biggest fear is when the speculators dry out the value of the cryptocurrency dramatically declines.

A stable currency would always expand with the supply of goods and services in the world in order to minimize and prevent deflation and hoarding. Also, it should be approved by the Federal Reserve system and other central banks guiding the system.

Bitcoin drops $2,000 in value as South Korea announces planned trading ban

In conclusion, nothing really becomes a good investment simply because it shoots up in price.

The governments all around the world aren’t going to let everyone start trading money anonymously and evade taxes, If, somehow cryptocurrencies to come into use legally, it would be by a government-backed form.

The cryptocurrency bubble will burst at any given time. This is a fact. Just be smart enough to cash out as soon as possible if you’ve invested in it, otherwise, you’d be left with a massive ‘headache’

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