The primary concern for “investors” today is whether they’ll “miss out” on the massive gains seen on the Bitcoin asset class. HINT: you won’t.
The Bitcoin drama has been played out many times before. A “new technology”… “new market” and all the other catchphrases which have been bandied around ALL point to a speculative bubble.
And whilst the bubble likely won’t “pop” for some time, the market ALWAYS gets it right in the end. If you are interested in seeing whether you can make some money from the “greater fools”, there are a number of things you need to know about the “currency” and its underlying technology.
Here they are…
- Bitcoin is NOT a currency
Bitcoin is a FINANCIAL LEDGER, NOT a currency. Big difference.
The idea behind Bitcoin was to create a “decentralized” ledger which would record transactions between two or more parties. The main aim of the system was/is to remove central regulatory bodies from the picture (banks/governments), thus allowing people (especially in developing countries) to trade even when their currencies were devalued through governmental issues, or other societal problems.
The problem most people don’t understand is that Bitcoin on its own does NOT store value. Learn more here.
Whilst many argue that “currencies” don’t do that today (as opposed to when they were backed up by the Gold Standard), the reality is that a Bitcoin’s worth is ONLY as much as the user places onto it. The buying/selling of Bitcoin is NOT an attribution of value. It’s a sign of a commodity.
The point where Bitcoin becomes a currency is when it holds value on its own standing. When you’re able to do things through Bitcoin which you would NEVER be able to otherwise… that’s when its “currency” value will become apparent.
Unfortunately, we’ve seen neither the adoption nor marketplace development for this to happen yet. Lots of hot air and wishful thinking from speculator traders, but nothing amounting to concrete progress with marketable products/services that ONLY bitcoin can facilitate
- Bitcoin’s Value Is Based On ‘Scarcity‘
One of the main attributes of the “Bitcoin” encryption algorithm is that it’s limited to 21 million “coins” (encrypted files). The Atlantic had a few things to say about this in their latest article.
This means that whatever happens, no one can tamper with it to increase its circulation (as a government would). Whilst this sounds all well and good, we all know this is not how things work in the “real” world. Things change. Learn how to protect your cryptocurrency investments using a cryptocurrency wallet.
The biggest problem “investors” have with Bitcoin is that it does not carry any intrinsic value of its own. With many “traders” suggesting the system has parallels with gold, the reality is that gold holds value in a number of different ways. Apart from the base functionality of being used in electrical circuits and jewellery, many people value it as a nice-looking precious metal.
As such, if you’re stranded on a desert island, you’d be able to trade the gold for food etc.The same CANNOT be said about “Bitcoin”, whose main value lies in the idea that it can only be limited to 21 million “coins”. The intrinsic values that drive the price of other asset classes (such as return on investment or market potential) have no bearing on Bitcoin.
Thus, if you plan on “investing” into the system, you need to appreciate a VERY important factor… how are you going to get your money back out? If you think you’re going to sell the coins to other “traders”, you’re making a speculative gamble, NOT an investment.
- Bitcoin Is An Encryption Algorithm For “Blockchain”
The main point people miss about Bitcoin is that it’s nothing more than an encryption algorithm. There are NO “coins” and everything you see is basically just a bunch of files. Even if you are a newbie you can always learn the basics.
The problem that many “traders” seem to have is they don’t understand the core premise of the idea — a completely digital financial ledger. There is no underlying premise of value, and almost everything to do with the system is open and visible to anybody who actually goes to look.
The important thing to note is that the real deal with “Bitcoin” lies in its reliance on the “blockchain” infrastructure. Blockchain is a new type of decentralized database which was created in 2008 by a group of software developers who wanted to fix the MAJOR issue surrounding computer networks – data integrity.
The idea of “blockchain” is basically to store a database across a network of 100’s or 1000’s of computer systems (rather than one central one), allowing for each “node” on the network to automatically update their data in line with the other systems in the network.
The importance of this is that no longer would data have to be stored on large central systems, which ONE body would control access to. Instead, large data infrastructure would be accessible by everybody no matter where they were in the world.
Whilst “blockchain” is a valid and very good technology infrastructure, one of the big problems it faced was its open nature. Having a large database spread across a global network of 1000’s of “nodes” would leave the data exposed to hackers. It was because of this that many people began developing encryption algorithms for the system, which ended up spawning the ideas for the likes of “Bitcoin” (crypto – cryptographic – currencies).
- “Bitcoin” Is a File
Yep, there are NO coins (sorry to burst the bubble).
Every time you “buy” a Bitcoin, you’re actually buying access to a file. That’s it. Nothing more and nothing less
The problem that seems to have pervaded the “investment” (more likely speculative trading) community is that the “Bitcoins” themselves will actually hold value like a “real” currency does. They’re mistaken and missing the point completely.
Bitcoin doesn’t hold value because it’s completely digital. The ONLY value it will bring will depend ENTIRELY on the products & services it facilitates the transaction of. To this end, the main benefit of “Bitcoin” lies in its ability to record & facilitate cross-border transactions.
Rather than actually providing the currency itself, the Bitcoin network/infrastructure should give travellers and businessmen the ability to exchange local currency (for example USD) and then exchange it back into another local currency (be it Euros, Yen etc) when they reach their destination. Because the Bitcoin is kept solely as a file (on your phone), the value of the transaction lies in its ability to evade regulation.
The point here is that Bitcoin should be seen as the equivalent of a cheque, rather than a form of currency. Inasmuch as a cheque allows a LOCAL currency to be transferred between two parties, the Bitcoin protocol facilitates the same thing. And since the Bitcoin network is completely decentralized (IE no single “bank” / “government” has control over it), the transfer process can occur in any location on the globe.
Please don’t get caught up with the hype. Bitcoin is NOT a currency. It’s a file which records a financial transaction between two parties. find out more with this introduction to cryptocurrency assets.
- The Bitcoin Algorithm (and thus its claim of being a “currency”) Can Change OVERNIGHT
The infamous “hard fork” means that the “Bitcoin” algorithm can be changed by anybody at ANY time.
To compound this, the open source nature of the technology (which means that ANYBODY can view/change the source code) means that if a large organization (government or hacking group) managed to not only create a different “fork” of the currency, but managed to implement it with a massive “mining” operation, you’d end up with a global devaluing of it.
This means that if you’re looking at “Bitcoin” as some sort of investment vehicle, your ENTIRE holding could be depleted OVERNIGHT. Most recently, the “segwit2x” hard fork was meant to change the entire premise of the bitcoin network – making it more efficient and simple to “mine” new coins on the chain. The “price” of the currency dropped to a mere $5,000 on the news that a collection of influential “miners” were pooling resources in an attempt to make the fork stick. Even Mark Cuban has a speculation on all cryptocurrencies.
The shock waves from this are still being felt today. As what it showed the world was that cryptocurrency’s greatest strength is also its greatest weakness… its decentralized nature means that ANYBODY with enough influence could actually change the underlying fabric of the “coin” and its use value. BIG problem.
- What You’re Seeing Is a Speculative Bubble
The main draw to Bitcoin right now has been is astronomical price spikes. The problem here is that this has suckered a large number of less experienced traders into “buying” Bitcoin in an attempt to “not miss out” on the gains.
Unfortunately, there is absolutely NO substantiation to the price of Bitcoin. The ONLY thing that’s driving it upwards is a buoyant secondary market of people buying-and-selling Bitcoin to each other. The fuel for this market comes from its new entrants, who are generally retail traders that don’t want to lose profits which they *could* have had.
The important thing to appreciate is that when you “invest” into an asset, the idea is that your capital will be used to either create or expand some sort of production capacity. This capacity will be used to create a product which is then distributed through service. The profit earned from the product will determine whether the “investment” is a success, with typically dividends being paid out to each of the asset’s share holders.
The problem with Bitcoin is that this does have any returns. The only returns people are seeing have come from the resale of the “coins” to other traders. As such, if you are even considering getting involved with the system, you’ll want to think very long and hard about whether you want to take the risks required to actually see a return on your money.
Being honest, it’s probably too late to see any sort of return now.
- Bitcoin’s Network Systems Are Called “Miners”
The way in which “blockchain” works is to have a large number of “nodes” (computers) all running the Blockchain software.
These systems work by synchronizing with all the other “nodes” on the network (to keep up to date), but also to create new files (known as “blocks”) on particular “chains”.
To this end, one of the most talked-about topics within the Bitcoin community is “mining”. This is basically where a computer will install the blockchain software and then work around the clock to create a series of “hashes” for the Bitcoin chain. For their effort, the “miners” are rewarded with Bitcoins after any successful hash discoveries.
The problem with this is that despite the news coming from some people – that they’ve made “$1,000’s” “mining” Bitcoin, there is actually no economic reason to do it. Not only are Bitcoin’s encrypted files becoming increasingly difficult to discover, but the trade-off of being able to discover them (more Bitcoins) relies on a falsely inflated “price” for each coin.
Ultimately, if you want to get into the “mining” of “Bitcoins”, the use-by date has long passed. It’s almost impossible to turn a profit doing it now (if you factor in energy costs), and the only rewards are encrypted files which have little to no intrinsic value.
- The ONLY People Making Money From Bitcoin Are The Exchanges
The way to “trade” Bitcoin is to essentially go to a trading exchange such as Coinbase or GDAX, upload your encrypted files (I mean “Bitcoin”) and then buy/sell as you desire.
The problem people don’t seem to have figured out yet is that the ENTIRE Bitcoin infrastructure is FREE and OPEN SOURCE. This means anyone can just clone the technology if they wanted to.
The money, therefore, is not in the “coins” themselves (which, again, are just files with particular algorithms) but in the fees these exchanges charge per transaction. Each time you buy/sell a set of Bitcoin, the exchange will typically ask for around 1% – 2% for handling the deal. Whilst this might seem menial, you have to appreciate that whilst the “coins” have been trading for eye-wateringly high prices… NO one is seeing ANY returns directly from them.
Even in the future – when Bitcoin has been “adopted” by every single person on the planet – how are the COINS going to generate any money on their own? They don’t. And that’s the point. “Investing” into an asset means you’re looking for something that’s going t provide a yield (return) every quarter or year. Bitcoin doesn’t do this, nor will it ever do this (in its current form). So from an “investment” perspective, perhaps the old adage is correct… “when they’re hunting for gold, sell them the shovels”.
- Bitcoin is NOT The Only Cryptocurrency
Despite receiving the lion’s share of media attention (and trading money), “Bitcoin” is just one of a growing number of cryptocurrencies available today. Such other currencies include “Ethereum” and “Litecoin”.
The problem with this is that Bitcoin is not unique. In fact, FAR from it… as mentioned, Bitcoin is ONLY an encryption algorithm – if you created a new algorithm, you too could be the creator of a new cryptographic currency… and many have.
In fact, just in November 2017 alone, there were around 25 different cryptocurrencies for sale on the secondary markets. Whilst this does NOT suggest that “Bitcoin” will be toppled as the leader in the field, it IS suggestive of how the future market will go.
You see, it’s speculated by some of the more institutionalized investment houses that the likes of “Bitcoin” etc will not create much value on their own… but will actually facilitate the creation of value by creating a number of new “marketplaces”. In a similar way to how Alibaba created the “Chinese Outsource” market in the west, it’s anticipated that the new spate of digital “coins” released onto the market will underlay a new way of doing business with people from much further afield.
For example, the core premise of Ethereum has been the idea of “smart contracts”, which are meant to give “everyday” people the opportunity to earn money without the need of a central bank / payment provider. Whilst an amicable idea, what’s most important is that the new “economy” this creates will almost entirely be handled with “Ethereum”‘s tokens (encrypted files). In other words, the value of Ethereum lies in its ability to create a “micro economy” of services.
Moving forward, the “coins” that will take off will likely be the ones who facilitate similar levels of transaction. Remember, the value is not in the “coins” themselves but what they help facilitate.
- FINALLY – How Many Users Will Actively BUY Bitcoins?
The big MYTH that we keep seeing is that people will want to “adopt” / “use” / “buy” Bitcoins in the future. This is wishful thinking. Most people don’t care about bitcoin, not least buying it.
People want services & products designed in particular ways, to suit their tastes and lifestyles Whether they pay for it with Paypal, Bitcoin or a Credit Card is secondary.
We’ve said it once and will say it again… Bitcoin is NOT a currency because it doesn’t store value in the same way a centrally regulated currency does. If each Bitcoin was tied to revenue-producing assets, such as a mine or farm, then you could suggest that it has a value on its own. But it doesn’t.
The closes Bitcoin will come to being an “actual” currency would be if it facilitated the creation of a marketplace like Alibaba, except for services/products from all around the world. Alternatively, its infrastructure could form the basis for a “Paypal” type service, whereby people can send REAL currencies to other users in the network.
An “investment” into the technology would therefore be best placed into one of THESE ideas, rather than the coins themselves. Someone’s been playing shell games with those.