10 Reasons Why you Should not Invest in Bitcoin Cryptocurrency
After seeing in the news that "the bitcoin loses more than 30% of value in its worst week since 2013" I have decided to write this article.
We are more than used to hear that bitcoin collapses and shoots up. Normally, an investment with this degree of volatility is only assumed by expert speculators and yet in my environment I know many people who are investing in bitcoin. Globally, alarming things are being heard that should be of concern to regulators.
Why do so many people invest in bitcoin?
Leaving short speculators aside, investors long believe that bitcoin in the future will be the medium of universal exchange and the deposit of value that will replace dollar, euro, etc.
Bitcoin and its technology brought the promise of having an anonymous exchange enviroment and without intermediaries. Actually, this already exists: pay in cash.
The advantage of paying with a cryptocurrency would be that it made it easier to pay remotely. However, in the real world, buying something with bitcoin or transferring funds - for example, to a family member in another country - is not easy at all.
There is no app that makes it easy even though many startups are trying it. And even if it becomes usable, the fees are so high that it would not be worth it. Using it to send money to another country and exchange it for traditional currency using a bitcoin ATM can cost 15% commission between issuance and withdrawal.
In turn, if we do not use it to buy or send money but to invest, intermediaries charge several types of commissions for operating with bitcoins:
- transaction commission: each intermediary sets it between 0.2% and 3% or even more
- fund deposit commission: if you do it with a card, for example, it is not a minor expense and varies a lot depending on the method of payment.
- fund withdrawal commission: when converting bitcoin into fiat currency some intermediaries apply commission on their part to which they can add commissions from your bank. It also applies if you change the bitcoins to other cryptocurrencies.
- Currency exchange commission: if you deposit dollars in an exchange that only accepts euros for example, you will support an exchange commission. To avoid it, use an intermediary that accepts your currency directly.
These commissions are difficult to calculate and in part they are only accessible once the account is created in the exchange. Drive carefully.
The biggest problem is not so much the commissions but the history of bad practices accumulated by the exchange or intermediaries.
Here are some of the tricks they use blatantly:
- wash trades - operations of an operator with himself to create volume and influence the price, as reported in Bitfinex.
- spoofing - huge buy or sell orders to simulate a moment of optimism or pessimism that is canceled as it affects the price. This practice has been denounced in Coinbase and others.
- painting the tape - like wash trades but with multiple participants. Mark Karpelès acknowledged before a judge that he used this technique in the Mt. Gox exchange.
- front-running - where an operator is able to filter his order before the clients at the right time.
Without the supervision of any authority, one of the biggest exchange called Mt Gox sank in 2014 losing all the bitcoins (850,000 bitcoins).
The most accepted theory is that they suffered massive robberies of their cryptocurrencies for not having adequate security measures.
In 2016 the same happened with the Australian exchange Igot and we could make an endless list of incidents of these companies.
It is difficult to think that these bad practices will disappear without regulation.
Bitcoin can not be a store of value
The currencies that we use daily, the euro or the dollar, are a deposit of value. This means that I am confident that if I keep 3,000 euros at home a year later those euros will have a value very similar to the initial one. If my salary is in dollars I know - with little variation - what things I can buy with him in the near future.
A cryptocurrency that aspires to replace the dollar can not have a 30% drop in a week, as it has just happened. It had drops of 93% in 2011, 70% in 2013 or 86% in 2014 (apart from the first years where the roller coaster was continuous).
And it can not multiply its value in a year without damaging the economy. Even the most dysfunctional traditional currencies do not reach these extremes. Let's imagine what the gentleman of Florida,who bought 2 pizzas for 10,000 bitcoins in 2010, would think right now.
Nobody will use a currency for daily transactions if its value is erratic. Without stability, no one will ask for a loan in that currency or use it to make purchases.
A world with bitcoin
Until recently, traditional currencies were conditioned on the gold standard: all the money in circulation was backed up in some government vault by bullion.
The supply of gold is limited and this caused that during the cyclical crises that occur in capitalism, governments could hardly act since they could not print more money than the gold that there was.
After the end of the First World War governments decided to skip this pattern because the enormous debts accumulated in the war that could not be supported with precious metal.
This led to the the agreements of Breton Woods and finally in 1971 the United States decided to completely abandon the gold standard.
The current currencies are not directly supported by anything other than trust in the currency itself and this allows governments to make major interventions on the economy, such as the one we recently experienced in the real estate crisis of 2007.
The current system is very imperfect but allows central banks to control credit or price stability by expanding or contracting the amount of money in the market.
A global economy based on bitcoin would be to return to the gold standard, that is to say to the rigid supply of currency, given that this cryptocurrency will stop producing when it reaches the figure of 21 million bitcoins.
80% of the total bitcoins have already been extracted by the miners and the difficulty grows exponentially. (already almost impossible with the current technology).
A global economy based on bitcoin would be to return to the gold standard, that is, to the rigid supply of currency.
The universal use of bitcoin would mean to deprive governments of monetary policy and to be able to contract and expand the money supply when they need it. The creator of Bitcoin explained in 2008 in a paper that bitcoin would eliminate inflation.
We are living in a contradiction in which more and more voices are asking for the elimination of physical money (using currency like the current one but only cards and transfers) to combat tax fraud and criminal activities while giving credibility to bitcoin that makes it even more difficult to monitor the transactions.
Sweden is making progress to reduce the portion of its economy that is made in cash. Spain limits every few years the money that you can pay in cash per transaction, forcing you to identify yourself electronically.
How is this compatible with a currency that leaves no trace of who issues and receives a transaction?
How does this help in the fight against fraud and crime?
How many investors in bitcoin comply with the treasury?
What about the ecological disaster. We are emitting between 8,000 and 13,000 kilograms of CO2 into the atmosphere for every bitcoin extracted in mainly Chinese farms whose electricity comes from coal. Inefficient even if there are people looking for creative applications.
But blockchain is fashionable
The greatest thing about bitcoin is the blockchain technology, which, in my opinion, is the innovation that will remain after the bitcoin fashion is over.
So if I know what I do, can I invest in Bitcoin or any other Cryptocurrency?
Bitcoin rises strongly because it has two types of investors: those who invest speculatively and, on the other hand, those who invest in the long term because they believe that bitcoin is the means of payment for the future.
For those who speculate - many have become rich - Bitcoin is a bet with a high risk but with great reward. With the entry of bitcoin in the derivatives market you can also bet downwards. If you know what you're doing, I have nothing to say.
If you are a long-time investor that you believe in bitcoin after all that I have put above I only advise you to have the cryptocurrencies in your power with a hardware wallet and that you do not invest what you can not afford to lose because we are not few who think that bitcoin has no value in the long term and is extremely unpredictable in the short run.