Bitcoin has been making news lately and I thought it would be nice to share my thoughts on it.
Let me first start off by saying that I am no expert when it comes to determining good financial investments. In fact, I would argue that I am a bit too cautious when it comes to investments and often miss out on what could be great investments. However, I figured it would be useful to share my thoughts on Bitcoin.
The recently soaring prices of Bitcoin have made headlines, with many people now investing in the currency. Several of my work colleagues had asked me if I had invested in it, or if I think it was a good investment. To both those answers, I said “no”. And here’s why.
First, let me get one thing out of the way. If you take a look at the price of Bitcoin 5 years ago and the price now, the investment is a no-brainer. You’d be crazy to not have wished you’d invested because you’d be making a very nice profit. However, at the price that it is now, and all the craze surrounding it, I don’t think it’s a good investment. I think that it’s currently in the “bubble” phase and the bubble is about to pop, with a lot of people losing a lot of money. However, as with most investments, hindsight is always 20/20.
As to why I think Bitcoin is a bad investment (other than the bubble phase), it’s a little more complicated. First and foremost: it has no inherent value. It’s value isn’t based on anything, unlike real-life currencies. Currencies are either based on the gold-standard or on other currencies. This means that they have an intrinsic value. This is not the case when it comes to Bitcoin. It’s value seems to be based on the fact that people agree that it will be more valuable in the future. Sounds very much like a bubble to me. Put it this way: if merchants suddenly decided to stop accepting it as a payment method, I believe the price of Bitcoin would plummet.
The other problem with it is the system surrounding transactions. Transactions take a lot of time to complete. Not only that, they are expensive. While you may end up paying about a dollar on a $100 transaction with a credit card, you’d pay around $15 at current Bitcoin prices with Bitcoin transactions. This significantly reduces the its feasibility in small transactions. The original appeal of Bitcoin came from its annonimity. You could make transactions without any identifiable information. As you can probably guess, shady websites used this to their advantage to sell illegal goods. However, for the average Joe, who I’d like to think obeys the law, anonymous transactions are useless.
The other issue I have with it is getting in and out of it. You have to interact with crypto traders, which lends itself to getting scammed. While many companies out there are reputable, there are no protections in place to protect the trades. This is, ironically, due to the fact that Bitcoin transactions are anonymous. Even when trading with trader of repute, there are still other problems. What if, in the future, they refuse to buy your Bitcoin when you want to cash out? You’ve suddenly lost a lot of your investment.
Note that in this entire argument, I do not point at its volatility as a problem. The large fluctuations in its price matches that of any high-risk investment. Its price can soar, or drop like a rock, all in the matter of hours. Bitcoin is just that: a high-risk investment.
I cannot recommend Bitcoin as an investment for anyone because I do not know what its future holds. It might be a globally-adopted currency and secures a foothold in the economic world, which would be great for Bitcoin investors. However, people could also wisen up to the fact that Bitcoin is inherently worthless. They would all try to cash-out before the bubble pops, making the price plummet. What does the future hold for Bitcoin? Only time will tell.
So, have you invested in Bitcoin? What are your thoughts on it? Do you think it is a bubble, or just a period of instability as it works its way into everyday life? Let me know in the comments.