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Is Bitcoin a worthy investment or a reckless risk?
By Oleg K Temple, January 2018
PART 1 — What are cryptocurrencies?
|2017 saw a gold rush that left pundits reeling in amazement. Initially, Bitcoin (BTC) scaled the value of gold, then became worth nine times as much as an ounce of gold, crushing the US$10,000 benchmark many swore it would never reach. And within a couple of months of that, it was knocking on the US$20,000/Bitcoin price tag. Some people seem certain that the cryptocurrency is destined to crack at least US$40,000 per BTC before the bubble bursts, but some say nothing stops the speculation frenzy from reaching seven figures per coin. Wait... What?! The red flag words above are bubble and speculation. Let’s rewind and look at how this madness was sparked, in order as to plot its potential trajectory.|
Bitcoin was created or invented in 2009 and released into the wild internet, as open-source software. While the genius of the code cannot be denied, to this day it is unclear whether its creator, the mysterious Satoshi Nakamoto is an individual or a clique of tech-savants.
|All we know is that in the fall of 2008 Nakamoto digitally published a description of the invention in a document entitled: "Bitcoin: A Peer-to-Peer Electronic Cash System". Nakamoto claimed that development of the software began in 2007. It was the first successful resolution of the double-spending problem for a digital currency, i.e. a guarantee that the same token or coin will not be used two or more times in the same instant. This was achieved by introducing a public ledger called the blockchain, a decentralised, public database relying upon independent verification (by a swarm or nodes running the software around the world) of the chronology of ownership of every single cryptocurrency amount. Each network node stores its own copy of the blockchain and every 10 minutes or so, a new fresh group of verified transactions, called a block, is harvested, grafted to the database and made public to all nodes.|
Nakamoto remained active within the project until 2010. As of February 2015, over 100,000 merchants accepted Bitcoin as a form of payment. The transactions are untaxed and governments and banks are completely cut out of the loop. This apparent maverick nature of the code is what appeals to so many users. That and the fact that its market value seems limited only by one’s imagination. In 2017 University of Cambridge estimated that 2.9 to 5.8 million unique users hold a cryptocurrency wallet, most utilising Bitcoin. But without a central body, like the Federal Reserve, who decides when and how new currency enters the market? This question will be answered in Part 2 of this article.
After the 2008 crash, many investors have become wary of the stock markets, having supposedly learned their lesson from speculation gambles on the financial, real estate and internet-based innovation arenas. Now many are selling gold and stocks to jump on the cryptocurrency bandwagon. Journalist and former chief investment strategist at Merrill Lynch, Richard Bernstein, calls this scenario ironic. He refers to Bitcoin as “Bitcon” and warns that the current pattern of the crypto market exhibits five tell-tale signs of all financial bubbles—ample liquidity, leverage, democratisation (widespread investment), new issues (initial coin offerings or ICOs have mushroomed around the marketplace), and high turnover.
In 2017 Bitcoin market certainly showed all the characteristics of a bubble, but that does not mean Bitcoins have no value—remember the real estate bubble? That too was driven by greed and speculation, the perpetual quest to find a greater fool to buy at a higher price, but the market folded as soon as brokers ran out of fools to keep it buoyant. However, real estate did not lose all its value. Yes, prices dropped, but since it is in limited supply, prices just became more realistic and began to reflect the value of the property, rather than potential resale value. Max Keiser of the Keiser Report believes that in 2018, banks will begin to diversify their reserves and stockpile Bitcoin, Ethereum and Dash cryptocurrencies alongside gold. It makes sense, as the gold market is in upheaval as CNBC.com reported: “A key trend in the gold market has just been broken and Bitcoin may be to blame. The gold miners’ ETF (GDX) has fallen nearly 15% from its September highs, while gold has plunged to lows unseen since the end of July.”
|The general rule of successful investing is to go against the grain of the trends—sell when the majority is buying and buy when the majority sells. The smart money went into Bitcoin between 2009 and 2014, well before 2016–2017, when cryptocurrencies made sensational news stories and all the ‘dumb money’ began to pour in. The currency continues to soar, as fools buy it at inflated prices and seek out greater fools to sell to, however, the supply of fools is not unlimited and bound to run out at some point. When it dries up, the stage will be set for a spectacular implosion and thousands of crypto-moguls will inevitably find themselves flattened by the shockwave.|
When it comes to Bitcoin, experts are still unable to agree whether its future lies as a solid exchange currency or merely as an artificial store of value. The advantage it has over gold is that its supply is fixed. Every year more and more gold is taken out of the ground and enters into the market, eroding the demand. Just like with diamonds, if this supply is unregulated (by essentially hoarding the precious metal in reserves), its value would plummet. With Bitcoin, however, it’s a different story. It has been clear from the start that the maximum quantity possible is 21 million, so its value is unlikely to go back to zero. However, if it becomes accepted as a regular currency, its volatility will cease. It seems that in the cryptocurrency game you need not one crystal ball, but several. And even then, crystal balls can be broken.
So, forewarned is forearmed. No one knows how close to the precipice the proverbial lemmings are, but few doubt that sooner or later the ground will disappear from beneath their feet. Dare you join the dash for cash? Find out how Bitcoins are created and distributed in Part 2 or this article.
Read part 2 of the article here: https://www.cornerstonesworld.com/article/is_Bitcoin_a_worthy_investment_or_a_reckless_risk_part_2_of_3