Beware of Bitcoin as a Safe-Haven Investment
The stock markets are heading for a major shock. Safe-haven investments like gold and silver are going to become popular again. But there’s an all-too-modern obstacle in their way that could attract some of the funds flowing away from Wall Street: cryptocurrencies—Bitcoin, in particular. How else can we explain the fact that the Bitcoin price is still near $10,000?
How can it be explained that bitcoins were selling for close to $20,000 a few weeks ago, only to see their value collapse? The fact that neither the rise nor the fall had a clear and logical explanation is one of the reasons that volatility and uncertainty will continue to plague this cryptocurrency.
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This mystery might explain what “crypto” really stands for. Yet, rather than prompt reflection, there are many who continue to believe, without having a clue in what they’re getting involved.
Even the stock market is more predictable. There are several tools that investors can use to “read” where overall performance might be heading. Anything from price-to-earnings ratios to company performance, market, and geopolitics help to establish a semi-predictable pattern.
Gold and silver prices are even more predictable, given their relationship to interest rates, inflation, and politics.
But cryptocurrencies and bitcoins? They respond to none and all of these factors at the same time. They are like a shapeless ghost.
Bitcoin has dropped below $10,000 again. Is it the start of another major plunge, such as what happened in early February? Perhaps. And that’s the problem with the belief that such a volatile instrument could ever function or perform as a currency. It took less than a year for Bitcoin to go from $1,000 to $20,000 and one week for it to drop to $7,000.
The surge in Bitcoin and all cryptocurrency valuations has attracted interest from many people. Many of the buyers have no clue about, nor interest in, technology or finance. Certainly, they fail to understand the “Dark Web” or hacking-universe roots of Bitcoin. Perhaps they prefer to maintain this ignorance, lest they be discouraged by their obscure technical and, at best, illogical nature.
To make sense of Bitcoin, it might be best to start from the basic question of what it is in the first place.
What Are Bitcoins?
Bitcoin is a digital currency, now better known as a cryptocurrency. This catchword describes what are, in fact, computer-generated values based on the solution of mathematical problems. The process of solving these mathematical problems is called “mining.” Therefore, many people have invested millions of dollars in “computer farms” that perform thousands of calculations per minute to “mine” bitcoins or other cryptocurrencies.
The alleged appeal of cryptocurrencies is that, unlike traditional currencies, they are completely decentralized. The mining of bitcoins occurs beyond the confines of a central institution such as a central bank. It’s digital fiat money that appeals to libertarians and hackers. In 2017, bitcoins went mainstream. They exploded on the scene, attracting millions of people who are otherwise normal Republicans or Democrats with zero understanding of computers, other than how to use “Facebook” and “Netflix.”
The question that many of the casual Bitcoin investors should be asking themselves is simple: In a few years, will a bitcoin be worth $10.00 or $1.0 million (as some are predicting). (Source: “James Altucher predicts bitcoin will reach $1 million by 2020,” CNBC, November 29, 2017.)
Even if you give this credibility, based on the argument that young people prefer bitcoins to traditional investments, there’s a more basic issue. It’s important to distinguish between Bitcoin as a currency and Bitcoin as an investment. As a currency, bitcoins must function the same way as other kinds of money. Its value then becomes subject to inflation.
But Bitcoin’s current use is different. Bitcoins and other cryptocurrencies have become a safe-haven investment like real estate, gold, art, classic cars (especially classic Ferraris, given the rising value of some models). Bitcoins have also served as a way to invest in currencies without having to worry about the near-zero interest rates in the United States and Europe.
Bitcoins and Cryptocurrencies Are Creatures of Cyberspace
On what basis does something that exists only in cyberspace—and which can vanish if someone hacks their crypto “wallet” or causes a blackout—acquire the value of a million dollars?
Bitcoin is not a prized piece of real estate in a good location. It’s not gold and it’s not silver and, despite the popular image of a shiny coin with a big B stamped in the middle, that coin exists solely in cyberspace.
Therefore, I would respectfully suggest that the champagne-and-caviar-dreaming Bitcoin buyers and holders be careful of those who have been predicting that their favorite cryptocurrency will reach $1.0 million.
Consider that bitcoins have a highly limited purpose. They’re too wobbly to use as currency and they’re most useful for those who want to hide their dealings and transactions. Those looking for ways to recycle funds or avoid paying taxes might find bitcoins and some other cryptocurrencies useful until regulators manage to find ways to control their movements.
The standard rhetoric on Bitcoin has fueled the idea that it will increase sharply in value over the coming years.
But the proponents of such cryptocurrencies ignore the high likelihood that sooner, rather than later, governments will intervene to ban them or discipline their sale and exchange. Now, that’s something that will stick a permanent pin in the bitcoin bubble. Not even the allegation that only 21 million bitcoins will ever be, ahem… “minted” will save these fascinating but ultimately Ponzi-like financial instruments from falling.
So Much for Bitcoin Becoming a Global Payment System
Bitcoin bulls might argue that the project is fueled by the hope that it might one day serve as a global payment method. They present it as a kind of “PayPal” without the fees and with the anonymity that so many desire.
Yes, perhaps that is true. Bitcoin may have started out as a genuine effort to become the instrument of choice for anonymous transactions. But it has neither achieved this nor can it hope to achieve it—at least within legal boundaries.
Indeed, the recent bull run that pushed Bitcoin to $20,000 has made the popular payment system idea almost impossible. First, the value is still expressed in dollars and euros or other hard currencies. Any drop or increase in one such currency will affect the value of Bitcoin. So does the fact that bitcoins are traded daily in a highly speculative environment without the terms of reference that help set certain boundaries on how much hard currencies can fluctuate.
Were the value of Bitcoin to stabilize, changing within a more currency-like frequency and transparency, it could become the cryptocurrency that many understand it to be. People would start to use and accept it for payment with much greater frequency. Bitcoins could displace all electronic payment systems, but, for the time being, Bitcoin transactions are time-consuming and cost more than the alternatives.
Promises that the technology will improve are believable, but that won’t matter if the bitcoins themselves don’t stabilize.
But, are promises of anonymity believable? The blockchain technology is the true mechanism that allows bitcoins and other cryptocurrencies to work. The blockchain is an electronic ledger that stores all Bitcoin transactions and they’re available for anyone to see. Identities are hidden, but their transactions are traceable, which renders them vulnerable.
Even those wanting to operate under the radar would still prefer using cash to cryptocurrencies. It’s still the better guarantor of anonymity.
