Thursday, December 28, 2017

Avoiding the bitcoin bubble.

I have had thoughts on bitcoin for sometime and finally decided to write about it. (See article here)

However there was a lot of things I didn't get a chance to write about because of limitations with getting it to fit on the printed page, so I will elaborate a little on this post.

I give several reasons in the article for not investing in bitcoin, at this time. The first is security. I mention the fact that there are direct scams but do not go into perhaps the biggest scam, ICO's. That stands for initial coin offering. ICO's have been popping up. The idea is that you get to purchase a new cryptocurrency coin right at the beginning, so you can reap the rewards when it explodes, just like bitcoin is doing. This is the old, getting in on the ground floor, idea. The problem is most of these simply to take you from the ground floor to the basement by running off with your money.

There is also the potential to loose all your bitcoin if you personally store it on a personal computer and that computer crashes. I mentioned, in the article, that you  could have others store it for you but those can be hacked. Mt. Gox was the most famous story and I mention it, but they are not the only bitcoin exchange that has been hacked and had millions of bitcoin stolen from those who store their bitcoin with them (here is a great article on some of the hacks). Many now believe that such hacks are being done by North Korean hackers. North Korea is under extreme sanctions from the US and other countries and is in desperate need to get cash to continue the arms race they are in. Bitcoin is one way the North Korean government has used to get around such sanctions and to directly steel the needed money. The more bitcoin increases in value the more we will see hackers and scammers doing whatever they can to get access to your money.  With credit cards and many other forms of financial exchange you have many built in securities, bitcoin does not. If you get swindled out of your bitcoin, or out of your money trying to buy bitcoin, you can kiss it all goodbye.

Regulation is the next point I make. Silk Road, the ebay of drugs, was shut down by the FBI in October of 2013. The story of how FBI agents were able to capture the administrator of the site will be told for years and is well worth reading if you have not (here it is). The site ran almost exclusively on bitcoin. As the story points out, bitcoin provides a certain level of anonymity that criminals love, but crime fighters do not. They will find a way and criminals will move onto something else. The fact that them vacating the currency will crash it's value will mean nothing to them, but will be to you if you  happen to buy it when it was high.

The next thing is competition. Recently bitcoin itself went through what they are calling a "hard fork".  Bitcoin insiders, (whomever that is) realized that bitcoin could not handle the amount of transactions that were occurring in a timely manner. So they came up with an improvement, the problem was there was arguments about how to deal with this and that is what led to the two currencies. But as I note this is not really the competition that I think could lead to a bitcoin crash. I note in my article there are 900 different currencies. Each I am sure has pros and cons but what this really points to is the fact that these are not difficult to make. Bitcoin does has the advantage of the first big one to market but it doesn't have the backing of the big financial players. What would happen if cryptocurriencies got big enough? What would stop a JP Morgan Chase from creating one? Visa? The United States Government? And at that point which one would people gravitate to? I don't know, but I would defiantly not say bitcoin is for sure the future even if cryptocurrency is.

Lastly I point out that why bitcoin is sold as a currency, most people are buying it as an investment, creating a false demand. I would never invest in something I didn't understand, and that is bitcoin for most of us. And I would never invest in something that is not what it claims to be. (This is true of Whole live insurance, it suffers from an identity crisis of trying to both an insurance and an investment and it does do both, just really poorly.) For bitcoin that is a currency. How is it not a currency? Well most people who trade for it do not use it to exchange for goods, rather they hoard it. I think we are all better off when we use currencies for currencies, insurance for insurance and investments for investments. Trying to mix these usually leads to poor currency, bad insurance, and low return investments, and that is exactly what I think will happen with most people who buy bitcoin.

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