The concept of Bitcoin is truly alluring. Getting in at the beginning of a potential windfall and getting out before everyone else gets in is a high-risk investor’s nearly-irresistible temptation. Can you abstain from the allure of investing in Bitcoin, or should you succumb? Here are some things to consider:
What is Bitcoin?
Bitcoin is a virtual currency. You can send it worldwide for few-to-no fees attached and pay for stuff you want, if the seller accepts it. It’s “open source” and not controlled by any government, corporation, or individual.
If you’re still confused, don’t feel bad. Here’s what Stephen Colbert tweeted about it: “Wow, if I invested a thousand dollars in bitcoin last week, today I would still have no idea how Bitcoin works.”
Money as a Medium of Exchange
Before we bash Bitcoin, money as a concept itself is a little hard to understand. Originally, people bartered and traded each other for goods and services. Eventually, it became more convenient to develop money, coins, and notes to use as an exchange. (You know, like the Roman coin, the dollar, the yen, the peso, the franc, the euro, etc.)
Today, money is a commonly-accepted currency that’s backed by gold and governments—wait. Money isn’t backed by gold anymore, at least not in the United States. In 1971, we went off the gold standard. Now, technically speaking, the dollar is only as credible as the US government.
Like other currencies, Bitcoin is just as credible as its backers.
If Bitcoin is only as credible as whoever backs it, it’s important you know that Bitcoin was put together by an anonymous group somewhere in the world, and no one has any idea who they are.
Now, I don’t know about you, but I know who the US government is. Bitcoin isn’t backed by any government.
Spiritual coach JP Sears puts it something like this: “Let me explain how Bitcoin works. People worry when there’s no gold behind money, but you don’t have to worry about that with Bitcoin because not only is there no gold behind it, there’s not anything else behind it either. So, technically it’s nothing. But, because the good-hearted anonymous people behind Bitcoin sold a limited amount of this nothing, it’s worth something. Scarcity is what makes anything valuable. So, with Bitcoin, scarcity is what makes nothing valuable as well.”
The Cybercurrency Investment Fad
The other name for cybercurrency is cryptocurrency because of the encryption security and “un-hackable” coding behind it, which is why digital currency is getting the attention of knowledgeable banking heavyweights. Aside from the technology attributes, should you be investing in Bitcoin or other types of cybercurrency or not?
It’s an absolute phenomenon that Bitcoin and other cybercurrencies have taken off. The whole thing feels like we’re buying and selling based on the belief and the success of a nonexistent enterprise offering a quick return to the first investors, but less and less to subsequent traders. Kind of like a Ponzi scheme.
Generally speaking, investing is based on market value, the fundamentals of any given company. If the company is healthy and projected to do well, it would be considered to be a good investment.
As far as Bitcoin goes, though, there are no fundamentals. There’s no government to look at. There’s no enterprise to value. It is pure speculation on volume of trades. It could not be more like the Wild West.
International Law-Free Zone
Now, in normal markets, trades are regulated, so they can’t be manipulated for one’s own advantage while leaving others high and dry. But, there is no such protection with cybercurrencies.
In fact, cryptocurrency “pump groups” are popping up right and left and are actually advertising that “if you get in and buy quickly with the group, for the next six hours they will be artificially skyrocketing the value of their coins,” and they will let you know right before they plan to sell and dump their holdings on the rest of the social media suckers out there.
Everything they are saying, doing, and advertising is absolutely illegal in any other situation; however, because cryptocurrencies are international and unregulated, they can do whatever they want.
Jerry Brito, executive director of Coin Center, a Washington, DC based non-profit advocacy group for cryptocurrency said, “People are desperate for anything that can bring them instant wealth. You shouldn’t invest in stuff you don’t understand, and you shouldn’t be investing in money, or with money, that you cannot afford to lose.”
It’s one thing if you use some of your “fun money” that you can afford to lose and invest in cryptocurrency to see what happens. It’s like betting in Las Vegas. You can’t expect to win. It’s more about having that roller coaster gambling experience. Unfortunately, some Americans are getting second mortgages on their homes just to get in on this cryptocurrency investment “fun.”
Mining the ICOs
New ICOs (Initial Coin Offerings), just like IPOs (Initial Public Offerings) except for coins, tokens or exchanges, are being announced almost every day. You can read stories online every day about people making a lot of money on the newer, lesser-known coins when they launch.
In fact, at this point, Bitcoin is a bit old school. There are other valid, real digital coin exchanges out there (if any of them can be defined as such), albeit with ridiculous-sounding names, like Insane Coin, Electroneum, WAX, DeepOnion, Pluton, NuBits, Clams, and Dogecoin, which started as an actual joke with that meme with the dog, but it now has over $2 billion in assets. It just exploded.
With billions going to these companies, it can be hard to ignore the excitement. However, mining these currencies takes a lot of energy. Literally. One analyst showed that “bitcoin mining” now consumes as much electricity as the country of Denmark, which is enough to power three million homes. For being a paperless currency, it sure isn’t helping the environment much.
Beware: Many different currencies are fighting for the top spot right now, and there is a lot of volatility. Once again, don’t invest unless you’re willing to lose all your money.
Theft is an Additional Cryptocurrency Investment Risk
The most common ways that theft occurs with cybercurrency is:
- Stealing private keys (make sure you secure yours)
- Exploiting wallet vulnerabilities (use highly-secure wallets)
- Operating fraudulent exchanges and investment funds
- Attacking legitimate exchanges directly
- Attacking dark web marketplaces
(HINT: If you don’t understand what any of this means, you shouldn’t be investing in cybercurrency, even with your fun money.)
Bitcoin’s Place in the Retirement Portfolio
In short, Bitcoin, or any other digital currency, should not have a place in your retirement portfolio. It is too volatile. The whole idea in retirement is reducing risk. The goal is to secure your lifetime savings, so you can make withdrawals and allow your accumulated wealth to provide you with a steady, reliable monthly income for the rest of your life.
Outside of your retirement portfolio, you can invest in Bitcoin or any other cryptocurrency that suits your fancy. (Or, you can visit a casino, racetrack, or bet on sports games.) As long as you can afford to lose the money, have fun, and good luck!
Robert Schiller said in an interview that Bitcoin is probably a bubble and that dabbling in Bitcoin lies somewhere between gambling and investing. The bitcoin craze reminds him of tulip mania in the 17th century. At that time, the price of tulip bulbs ballooned, peaked, and crashed in early 1637. The event is considered one of the first recorded speculative bubbles where a buying frenzy and lofty expectations replace rational justifications for an item’s value.
