Bitcoin. It’s everywhere. You see it in the news. People talk about it around the water cooler, and it appears on almost every internet ad. I wouldn’t be surprised if it started appearing in local paper opinion pieces.
My own involvement with bitcoin started in November 2013 over Thanksgiving dinner, when my brother announced he had bought some at $200. He praised it, spoke of the “wave of the future” and how someday it would be the most common currency. My advice was simple: Sell, sell, sell. He refused, stating that it would one day be worth over $10,000 per coin.
I thought he was crazy. I was somewhat justified when a short time later it fell from $1,000 down to below $300. However, he was anxious to text me when recently it hit $10,000. (It’s now worth over $14,800.) This has made my brother a considerable amount of money.
He is not alone. Much of what is driving the current news is the talk of teenage millionaires and bitcoin billionaires who have made a fortune.
So why am I writing an article on bitcoin? Is it to admit I was wrong and to tell you I am joining the bandwagon? No. Rather, as talk of bitcoin billionaires continues, we may ask, “What if I had bought early?” And there is always the danger that we decide, “Better late than never.” My goal is to keep you from making or even thinking about such a mistake.
Here are the reasons why:
1. Security. No potential gain can compensate for a 100 percent loss. I am not talking about the value of bitcoin going to zero. You can lose all your bitcoin investment without that happening. This can occur by simple fraud. Every day new sites pop up claiming you can get a good deal on bitcoin only to disappear a few days later after they have swindled people.
But even with reputable dealers, there is risk. Mt. Gox, the biggest name in the business, handled about 70 percent of all bitcoin transactions until it went bankrupt in April 2014, stating it had lost $480 million in bitcoin investments. There is no FDIC for bitcoin. Indeed, you might be saying, “If only I had bought bitcoin in 2013?” Well, if you had, there is a decent chance you would have lost it all as part of the Mt. Gox failure.
2. Regulation. A study came out in November of this year titled “Sex, Drugs and Bitcoin” by an Australian research team. It found that half of all bitcoin transactions are for illegal activity. The problem with that is that the value of the currency is based on demand. As bitcoin is used more and more for illegal activity, governments will find ways to regulate, restrict and limit the currency. This will limit criminals’ demand for it. If half of the demand dries up, you can expect a big fall in the price.
3. Competition. Bitcoin is not the only cryptocurrency. There is litecoin, Ethereum, zcash, ripple and over 900 others. So even if cryptocurrency is the currency of the future, no one truly knows which one or ones will catch on and which ones will flare out.
After all, it’s not always the first big player to market that wins. Otherwise you would be checking your AOL email after posting to your MySpace page, all while yelling at the kids to stop fighting over the Atari.
4. A bubble? The term bubble is used a lot, but I think it applies to bitcoin. What is driving the demand for bitcoin? Is it its great utilitarian use as a currency or speculation?
I think demand for its use as a currency is increasing but not nearly as much as the demand from pure speculation. Demand that relies on more people speculating on it begins to look much like a pyramid. The problem is at some point all pyramids run out of people at the bottom.
The proof that most demand is speculative? I don’t see signs all over town saying, “We now accept bitcoin.” I don’t hear the guy next to me in line asking the barista if they accept bitcoin. Even people like my brother who praise the utilitarianism of bitcoin don’t use it. My brother’s bitcoin wallet is mostly an electronic mattress for holding his money. Ask anyone you know who owns bitcoin and see if they actually use it as a currency.
If you are considering buying bitcoin … why? Do you really wish you could pay for your burger and fries with it, or do you only want it to get more of the currency you actually use, American dollars?
Nathaniel Kaey Gee resides in Boulder City with his wife and six kids. He is a civil engineer and enjoys writing any chance he gets. You can follow his work at www.thegeebrothers.com.