Why You Shouldn’t Put Money Into Bitcoin

By | 2018-10-06T14:53:28+00:00 19 September, 2018|Investments|

Why You Shouldn’t Put Money Into Bitcoin

 A lot of people are caught up in the crypto craze these days. Cryptocurrencies have rocked into the mainstream’s focus in 2017 when major cryptos such as Bitcoin, Ethereum, and Ripple skyrocketed and made early investors rich.

No doubt about it, cryptocurrencies and blockchain technology are exciting development. But should you put your hard-earned cash into them?

Well, you have got to be mental! I know that statement won’t make me a lot of friends in the crypto fan-boy community, but you have now been officially warned: Cryptocurrencies such as Bitcoin are a ponzi scheme.

Why?

Ponzi schemes all have one thing in common: They rely on a steady stream of new buyers offering higher prices than the price previous buyers have paid. Ponzi schemes have often led to speculative manias that create and quickly destroy spectacular levels of wealth.

History is ripe with speculative manias: The tulip mania in the Netherlands in 1637 and the dotcom bubble in the early 2000s are a good example of greed taking over investors’ minds. The bubble eventually implodes when new buyers are in short supply and existing investors start to doubt the real value of their “investment”.

 

Don’t Buy Bitcoin, For Two Reasons

First of all, it is important to understand the difference between investing and speculating. People invest in an asset such as a stock or real estate because of their long-term growth prospects. Over the long haul, the economy will grow causing stocks and real assets to appreciate in value. The important part is that such assets have an underlying value, or an intrinsic value which is derived from cash flow.

Bitcoin, on the other hand, does not have a real underlying value. Sure, you can make payments anonymously on the internet (in those few instances where institutions or individuals accept crypto payments!), but people mainly buy Bitcoins because they hope they weill be able to sell them at a higher price later on. It is an entirely speculative enterprise from the get-go! If you are considering buying Bitcoin, understand that you are not investing, but speculating. And as such, you should be prepared to lose all of your money.

Secondly, Bitcoin really isn’t really a store of value, nor is it a valid method of making and receiving payments.

Assume someone owes you $100,000 and that person wants to repay you in Bitcoins. So far, so good. But what if the price drops after you have received your Bitcoins?

Say, for instance, the person that you lent money repays you $100,000 in Bitcoins. The next morning the price drops 10 percent. Your holding in Bitcoin is now worth $90,000. Who would accept this kind of price risk? Yes, some individuals may want to have this kind of exposure (tyically, speculators), but do you think a regular company out there to make a buck will accept this extreme amount of price risk? Of course, not. In addition to the high volatility in the crypto markets, transactions are still slow and comparatively expensive.

The truth is that while the story of Bitcoin is exciting and money was indeed made by early adopters years ago, there is a huuuuuge chance that speculators buying into the craze at this point will lose their shirt. Don’t do it!

The crypto currency bubble is strikingly similar to other bubbles in human history. Greed has taken over, and it likely won’t end very well. Speculators simply hope to sell to the next sucker at a higher price. Most likely, this bubble will end just like all the other bubbles in history where “investors” lost their fortunes. If you are smart, sit on the sidelines, investment in quality dividend-paying stocks and other IPAs, and wait for the bubble to burst.