Understanding the Impact of

Cryptocurrency and Bitcoin

Over the last few years, the term cryptocurrency has rapidly gained visibility in the
public eye. In today's day and age, cryptocurrency is fast becoming essential to people
who value privacy, and for whom the idea of using cryptography to control the creation
and distribution of money does not sound too far-fetched.

Today, cryptocurrency, led by Bitcoin, Litcoin, Ether, etc. are taking the financial world
by storm as more people invest and buy these currencies. At the same time, there is still
widespread confusion and bias which retracts for the overall effectiveness of
Cryptocurrency. Educating users about such alternative forms of currency is extremely
important given its volatile nature. In this article, we will try to provide a holistic
outlook towards Cryptocurrency and how it's affecting the world we know today.

What Is a Cryptocurrency?
Cryptocurrency is designed from the ground up to take advantage of the internet and
how it works. Instead of relying on traditional financial institutions who verify and
guarantee your transactions, cryptocurrency transactions are verified by the user's
computers logged into the currency's network. Since the currency is protected and
encrypted, it becomes impossible to increase the money supply over a predefined
algorithmic rate. All users are aware of the algorithmic rate. Therefore, since each
algorithm has a roof limit, no cryptocurrency can be produced or "mined" beyond that.

Since Cryptocurrency is completely in the cloud, it does not attain a physical form but
have a digital value, and can be used for digital equivalent of cash in a steadily
increasing number of retailers and other businesses. Bitcoin was the first cryptocurrency
that was ever created, and while there is a small fee for every cryptocurrency transaction,
it is still considerably lesser than the usual credit card processing fees.

Why Use Cryptocurrency?

Bitcoin is the most popular cryptocurrency which has seen a massive success. There are
other cryptocurrencies such as Ripple, Litecoin, Peercoin, etc. for people to transact in.
But for every successful cryptocurrency, there are others which have died a slow death
because no one bothered to use them, and a cryptocurrency is only as strong as its users.
Some of the salient features of Cryptocurrency include -

 Cryptocurrency can be converted into other forms of currency and deposited into
user's accounts at a lightning speed
 Most Cryptocurrency can be transacted anonymously, and can be used as
discreet online cash anywhere in the world. Users therefore do not have to pay
for any currency conversion fees
 While not 100% immune from theft, Cryptocurrency is generally safe to use and
difficult for malicious hackers to break
 Bitcoin and other Cryptocurrency can be saved offline either in a "paper" wallet
or on a removable storage hard drive which can be disconnected from the
internet when not in use

Bitcoin - A Glimpse into the Future

2016 was the year of Bitcoin, and saw this digital currency grow almost 79% as
compared to Russia's Ruble and Brazil's Real, the world's foremost hard currencies. As
a result, it emerged as a better bet for investors while beating foreign exchange trade,
stock exchange trade, and commodity contracts. There are many reasons why the impact
of Bitcoin is exceptionally relevant today, and why the Cryptocurrency of 2018 is now
here to stay. These include -

1. Reduced Remittance

Many governments around the world are implementing isolationist policies

which restrict remittances made from other countries or vice versa either by
making the charges too high or by writing new regulations. This fear of not
being able to send money to family members and others is driving more people
towards digital Cryptocurrency, chief amongst them being Bitcoin.

2. Control Over Capital

 Many sovereign currencies and their usage outside of their home country are
being regulated and restricted to an extent, thereby driving the demand for
Bitcoin. For example, the Chinese government recently made it tougher for
people as well as businesses to spend the nation's currency overseas, thereby
trapping liquidity. As a result, options such as Bitcoin have gained immense
popularity in China.

3. Better Acceptance

Today, more consumers are using Bitcoins than ever before, and that is because
more legitimate businesses and companies have started accepting them as a form
of payment. Today, online shoppers and investors are using bitcoins regularly,
and 2016 saw 1.1 million bitcoin wallets being added and used.

4. Corruption Crackdown

Although unfortunate, digital Cryptocurrency such as Bitcoin are now also

seeing more usage because of the crackdown on corruption in many countries.
Both India and Venezuela banned their highest denomination and still-
circulating bank notes in order to make it tougher to pay bribes and make
accumulated black money useless. But that also boosted the demand for Bitcoins
in such countries, enabling them to send and receive cash without having to
answer to the authorities.

The Real-world Impact of Virtual Money

While Cryptocurrency and its usage is at an all-time high, so are the misconceptions
about it. Most people still seem to ask - Why use Bitcoin? Since such currencies use
different algorithms and are traded in unconventional ways, it is important to lookout
for some important characteristics before investing in Bitcoin or others of its ilk. This
includes -

 Daily Trading Volume and Overall Market Capitalization

Market capitalization of a cryptocurrency is the total worth of all its forms which
are currently in circulation. New forms of Cryptocurrency might not be widely
available, and therefore might not have high market capitalization. Similar to
 this is the daily trading volume, and a cryptocurrency which has higher trading
volume than the others is considered more successful.

 Verification Channels

Each cryptocurrency has its own verification method. One of the most common
methods for verification is called "Proof of Work". Herein, to verify a
transaction, a computer has to spend time and computing power to solve difficult
mathematical problems. On the other hand, "Proof of Stake" method allows
users with the largest share of the cryptocurrency to verify the transactions,
which requires far less computing power.

 Acceptance of Cryptocurrency

Unless a cryptocurrency is not accepted by major retailers or other businesses

that you deal with, it doesn't stand much use. That is why Bitcoin still remains
the most popular form of digital currency, since its reach is widespread and is
accepted by many businesses and retailers alike.

Toning Down the Frenzy - Challenges Ahead for

Bitcoin
While Bitcoin's astronomical growth cannot be understated, Cryptocurrency in general
have several challenges to meet before finding universal acceptance. These challenges
include -

 Safety and Reliability

Purely based on its digital form, Bitcoin and other types of Cryptocurrencies are
nowadays the favorite mode of payment for both hackers and criminals because
of the air of anonymity it lends. This instantly makes the general populace weary
of using it. In 2014, Mt. Gox, the largest Bitcoin exchange was hacked and
robbed of almost $69 million, thereby bankrupting the whole exchange. While
the people who lost money have now been paid back, it still leaves a lot of
people wary of the same thing happening again.

 The Debate on Bitcoin Scalability

The cryptocurrency community is up in arms over how the blockchain will be

upgraded for future users. As the time and fees required for verifying a
transaction climbs to record highs, more businesses are having a tough time
accepting Bitcoins for payment. In early 2017, more than 50 companies came
together to speed up transactions, but till now the results have not yet been felt.
As a result, more users might start using normal modes of currency to overcome
such blockchain hassles.
  The Rise of the Rivals

Today, Bitcoin is not the only game in town, and while its value has increased
by almost 100% since the beginning of 2016, its share of the digital currency
pile is rapidly reducing owing to almost 700 different competitors. Its market
share has reduced to 50% from 85% a year before, a sign of the times to come.

 Unrecognized by Governments

Most of the general populace doesn't understand Bitcoins, and nor does most of
the world's governments. The cost of gaining a license to set up cryptocurrency
companies is sky-high, and there are no regulations in sight which might make it
easier for people looking to invest into them. The U.S. Securities and Exchange
Commission recently rejected a proposal by Bitcoin to run a publicly traded
fund based on the digital currency, which in turn led to a big plummet in
Bitcoin's shares.

Digital Vs Crypto
Digital currencies have been around since computers enabled the electronic storage of
account balances online. A digital currency can be broadly defined as money stored in
electronic form that can be used to make and receive payments. Crypto currencies are a
much more recent phenomenon, with Bitcoin the most widely recognised. A
cryptocurrency is a subset of digital currency whereby encryption techniques are used to
regulate the creation and transfer of currency units. Cryptocurrency market
capitalisation reached USD1.3bn by end – July 2017, according to website
www.coinmarketcap.com, which is divided among about 1000 currencies. Usage is
therefore growing quickly, but can they be considered money?

Is it money?
The short answer is no. In order to be considered currency, a form of money (i.e. digital
currencies) must be used as a unit of account, a store of value and a medium of
exchange. Cryptocurrencies are being used as a store of value (although with
significantly higher volatility than traditional currencies) but broadly fail to satisfy the
other two criteria.

Scale of usage is certainly an issue that is unlikely to see cryptocurrencies impact

monetary policy in the foreseeable future. Cryptocurrencies do not have intrinsic value.
Although limited as a resource – bitcoin and other cryptocurrencies have a finite supply
– investors mainly trade on the ability to exchange the cryptocurrency for a higher value
in the future rather than the ability to purchase other goods and services (although usage
for other initial coin offerings are rising).

As a medium of exchange, cryptocurrencies are only used to a limited extent to

purchase goods and services. Additionally, purchases are also generally transferred back
to sovereign currencies, like the US Dollar or Euro, and as such crypotocurrencies are
not used for accounting purposes, therefore do not satisfy the unit of account
characteristic.

Trust is lacking, volatility is not

Volatility is a hindrance for the universal acceptance of cryptocurrencies to garner a
wide following and for paying and settling transactions, a unit of account and a store of
value. Digital currencies exhibit extreme volatility: buying power is therefore constantly
changing.

Price stability is critical for currencies to be a trusted medium of exchange: if a

particular basket of goods costs 100 pounds today and 50 pounds in a week‘s time, then
this provides disincentives to widespread adoption. If the digital currency value is
dropping, it encourages consumers to get rid of it as quickly as possible, and if it‘s
rising, to hoard the currency.

Monetary policy implications

In contrast to sovereign payment systems and other digital currency, the innovation of
the distributed ledger (that was developed for Bitcoin), whereby transactions are
recorded and verified by a decentralised group of network participants called miners,
digital currencies do not need a trusted third party to exchange and settle transactions
between two independent parties to a transaction. Cryptocurrencies, through their
decentralised nature circumvent the normal monetary channels.

In this way, monetary policy would be undermined if the scale of usage were to expand
and challenge fiat currencies for dominance as a means of payment. Furthermore,
cryptocurrencies are global, exacerbating the potential problem, because usage bypasses
sovereign (and central bank) jurisdictions. Monetary policy would need to become more
globally coordinated in order to have an impact in a world of cryptocurrency dominance.

Another issue with cryptocurrencies in implementing monetary policy is the limited

supply. Without the ability to manipulate money supply, the problems with potential
hoarding being able to decrease supply are twofold. By not being able to increase
money supply, the supportive nature of policy is reduced. In a world of quantitative
easing, a fixed supply of (digital) money is clearly an impediment to the effective
transmission of monetary policy. Moreover, the reduction of the money supply can lead
to deflation by reducing demand.

Central bank digital currencies

In a time of crisis, a decentralised digital currency framework is not likely to engender
confidence in the case of a financial crisis, as there is no one institution standing behind
the value of the digital currency. Cryptocurrencies have a decentralised distribution
network, and unlike fiat currencies or a central bank issuing digital currency, there is no
trusted counterparty that, in essence guarantees, the currency. Indeed, recent ‗hard forks‘
in both Bitcoin and Ethereum highlight the uncertainty of a cryptocurrency‘s value.

A digital currency issued by a central authority (clearly the antithesis of the rise in
popularity of cryptocurrency) but using a distributed leger framework could reduce the
number of intermediaries and enhance the effectiveness and efficiency of monetary
policy in several ways. Firstly, transactions would be independently verifiable and this
would arguably increase transparency. Secondly, currency being settled outside of a
single entity could potentially save time and be less costly. Importantly, by funding
being distributed straight to the consumers and businesses, the transmission of policy
would be more direct, essentially bypassing the banking system.

The ECB highlights issues of remuneration: the interest rate for digital currency could
influence demand. If the central bank remunerates at the deposit rate (for many this is
currently negative) it would dissuade the usage of the currency and be more compelling
to hold deposits at normal banks which generally do not charge negative interest rates.

If the central bank put the deposit rate at 0% (instead of a negative rate), this
could also cause problems: banks could set up non-bank subsidiaries that would be able
to hold digital currency at the central bank for no cost, thereby undermining the effects
of monetary policy.

The bottom line…

Many major central banks, including the Bank of England (BOE) the Bank of Canada
and the European Central Bank, have tested or considered the ability to use digital
currencies and distributed ledger technology in the monetary policy arena.

Due to elevated volatility and the lack of widespread usage, crypto (or digital)
currencies will not impact monetary policy in any significant way. A central bank
issued digital currency has the potential to make monetary policy more effective,
however, there are many hurdles that need to be overcome in terms of the framework
for pricing and distribution.

While excitement about Bitcoin appears to have subsided, the blockchain technology
underlying Bitcoin and other cryptocurrencies is attracting growing interest (e.g. Oliver
Wyman 2016). Central banks have joined the FinTechs and bricks-and-mortar financial
institutions in paying attention (Economist 2016). Not a week passes without a
monetary authority declaring interest in the technology, and in opportunities to employ
it. What are the likely implications of this for central banks and the monetary system?

Internet-based technology has made it cheap to collect information and to network. This
has empowered the sharing economy and allows FinTechs to seize intermediation
business from banks. The banks, reputationally damaged by the financial crisis, are
degraded and may become utilities as a result. But both FinTechs and ‗sharing economy‘
businesses manage information centrally – they serve as middle-men – exactly as
traditional financial institutions do.

Blockchain technology undermines the ‗middle-man‘ business model. It makes it harder

to cheat in transactions, and so reduces the value of credibility lent by trusted
intermediaries. It is less important that counterparties may not know and trust each other.
A lack of trust becomes less of an impediment to trade.

This opens up new possibilities for financial market participants. Getting rid of
middlemen saves cost, speeds clearing and settlement (possibly easing capital
requirements), and reduces operational risks. It can also help to implement tailor-made
transaction protocols, or to keep transaction details confidential while at the same time
providing records for supervisors. Maybe most importantly, it improves the bargaining
power of buyers and sellers when they deal with brokers. If you are in the
intermediation business, this is worrying.

Blockchain technologies may lend credibility to decentralised transactions, whether

denominated in traditional fiat currency or virtual cryptocurrencies. This creates novel
challenges and opportunities for central banks (see Raskin and Yermack 2016 for a
discussion of the legal implications).

Consider first the rise of cryptocurrencies and the currency competition that derives
from it. Cryptocurrencies have a fundamental advantage, which is the power to commit
using ‗smart contracts‘. Unlike the supply of fiat monies that hinges on discretionary
decisions by monetary policymakers, the supply of cryptocurrencies can, in principle,
be insulated against human interference ex post, and at the same time be conditioned on
arbitrary verifiable outcomes. Cryptocurrencies have the potential to overcome
commitment problems that have long been at the heart of monetary policy, for example
by having a smart contract fix the growth rate of the virtual currency subject to clearly
defined escape clauses. Currently, however, the issuing bodies of most cryptocurrencies
do not make use of this possibility. Like traditional monetary authorities, they allow
discretionary interference by their respective ‗monetary policy committees‘ instead.

In other respects, cryptocurrencies are similar to US dollars in a dollarised economy.

Demand for these currencies is fostered by loss of trust in the domestic central bank or a
desire among transacting parties to hide their identities. Widespread use would have
important implications. For example, the more payments are made using
cryptocurrencies, the lower the demand for traditional central-bank-issued cash and
reserves.

As a consequence:

 Seignorage revenues fall;

 Therefore, the central bank‘s ability to monitor the payments system diminishes;
and
 In the extreme, the monetary authority may not only lose control over the money
supply and credit, but also the ability to provide lender-of-last-resort support

Don’t panic (yet)

Cryptocurrencies offer limited benefits for users who do not have overwhelming
privacy needs. Their usefulness as money suffers from limited liquidity, which creates
exchange rate volatility. As long as the number of people using cryptocurrencies is
small, the incentive for others to adopt them too remains limited. But strong network
effects may quickly disrupt the payments system once a critical mass of users
coordinate on, and adopt, a specific cryptocurrency.

Blockchain-facilitated transactions denominated in domestic currency may affect central

banks much faster and more directly. Consider a security purchase paid with domestic
currency using the blockchain. The change of ownership of the security may go hand-
in-hand with an exchange of claims on domestic currency (the seller‘s account at a bank
participating in the blockchain is credited, for example), or of actual central bank money
(following Koning 2014, we might call this ‗Fedcoins‘). In the former case, payment
eventually requires clearing through traditional central bank managed channels, at the
cost of added complexity and resources. In the case of Fedcoins, it doesn‘t. If base
money ‗lives‘ on the blockchain, the buyer can directly transfer domestic currency to
the seller. Transfer of ownership of the security and of central bank money may then
occur jointly, in real time.

So, to fully reap the benefits of distributed ledger technologies, it is in the interest of
traders to have the central bank participate in the blockchain. Eventually, having central
banks on board could even lead towards dismantling central bank-managed payments
systems. We can shift all clearing to the new, decentralised networks.

Should central banks oppose the new technology?

If central banks don‘t join forces, they risk being cut out from intermediation and
surveillance. They also run the risk that payment service providers may move to other
currency areas with an institutional environment that is more appealing for buyers and
sellers. Neither can be in the interest of monetary authorities, even if the technical and
legal challenges of engagement are huge.

Central banks increasingly are under pressure to keep ‗their‘ currencies attractive. They
should let the general public access electronic central bank money, not just financial
institutions (Niepelt 2015). To do this, they should embrace the blockchain.

The underlying technology securing bitcoin is known as the blockchain.

In my article Cryptocurrency Is A Bubble I predicted it would crash. Well I was wrong,

it crashed twice. In part two, Cryptocurrency Is A Bubble, Revisited, I argued you
should skill up because this was the big one. Which I‘m sure many are doing right now.

Now the big question is what is going to happen next?

It is going to crash again but the trend is going to be up punctuated with gut wrenching
corrections. This is only the beginning, not the end, of Bitcoin and the other 1,000
altcoins.
There is only one call to make. That call is simple and was highlighted by Jamie Dimon
of JPMorgan: Is cryptocurrency a fraud? JPMorgan thinks it is, and you'd think they
should know, having been investigated by the likes of the FBI and fined bazzillions for
such things.

However, I say no.

Clearly if you agree with Jamie Dimon and you are right that people just ―can‘t go
around inventing their own currency,‖ you should just avoid the whole area. Don‘t let
go of that view and buy in at the top. Now that would be painful. If Dimon is right,
cryptocurrencies will end badly just like many banks.

If cryptocurrencies are not frauds, they will grow. The key question, then, is what is the
current market cap of all cryptocurrencies on earth now and what could it be in the
future?

It is currently $121 billion. (Though by the time you read this it might be a lot higher.)
$121 billion is equivalent to the market cap of McDonald‘s, esteemed purveyors of
hamburgers.

So here is the Google trends for them both--and I‘ve thrown in the U.S. dollar, for fun.

Google trends

Google trends for cryptocurrency versus Macdonald's and the U.S. dollar

So it looks as if Ronald, like China, needs to worry about Bitcoin becoming too
important.

But seriously, a financial instrument category with $121 billion float is not a material
issue to the world economy.

Or is it? Clearly China sees it as a looming threat. Having banned initial coin offerings
(ICOs), it then banned Bitcoin exchanges, hand that triggered this crash.

I think it is very bullish that China wants to clamp down. China bans powerful ideas
because it cannot stand any but its own. China just endorsed the power of
cryptocurrencies so any doubts about the strength of the concept can be forgotten. If
cryptocurrency is this potent, then a market cap of $121 billion is a drop in the bucket.

So what should the float of a global currency platform capable of making the Chinese
government skittish be?

Let‘s take gold as a benchmark--after all, that is what its fans claim it is. The market cap
of gold reserves is held to be $5 trillion and gold is good for nothing but dentistry,
electronics and payments in times of war. So why couldn‘t cryptocurrencies match it?
As long as a cryptocurrency can be accessed and created then its money supply can
grow to meet the needs of its user base. As Bitcoin and the likes are nowhere near the
mainstream then the upside must be multiples of where it is today. That could be a
striking multiplier.

So what could go wrong?

The main risk is that cryptocurrencies could be banned outright everywhere. It is an

obvious thought and the one grasped at most frequently. I don‘t think this will happen,
as for a start, politicians don‘t close their own loopholes.

Furthermore, it only takes one global jurisdiction to allow cryptocurrency and the
distributed nature of cryptocurrencies and the Internet leaves the door wide open for all.

What is more, blockchain technology has huge potential to revolutionize economies by

building a trustless infrastructure with transparency. This will disintermediate layers of
inefficient gatekeepers whose rent seeking behavior gums up the economies of the
world with their unnecessary tollgates.

Any economy using that technology will wield a massive economic advantage against
luddites so the outcome is economically inevitable.

Luddites can‘t win. Have they ever?

You could say cryptocurrencies are better than old style currencies and that their very
nature makes them invulnerable but I feel the protection is in the pure efficiency of
blockchain technologies and the giant economic advantages they will bring.

Blockchain and cryptocurrencies are genies that won‘t go back into their bottles and like
the Internet, change everything.

Blockchain is about trustless systems. Trustless systems, of which Bitcoin is one, are
the real revolution behind this surge. Trustless systems are a platform for tremendous
progress. Imagine all the things in your life that would be better if you didn‘t have to
trust or distrust people. How many hours a week do we spend unlocking doors or
substantiating facts or protecting ourselves from error and "bad actors."

Blockchain is going to be huge and it would be perverse if the thing that is driving it
forwards, cryptocurrency, was somehow going to be run out of town on a rail at the
same time. So while China might try and nip Bitcoin in the bud I think it is unlikely that
less twitchy and less totalitarian countries will follow suit. It could happen but I believe
it won‘t.

So if it is not banned, what is the future?

The clamor is a clue--cryptocurrencies are creating more than $121 billion of noise, the
real is trend to look at is the U.S. dollar. That is 13 trillion dollars of money talking.
So if Dimon is right, Bitcoin is perhaps worth a bit more than the noise made by Big
Macs, which is $23 billion dollars of happy meals, but if he‘s wrong then ‗to the moon‘
is certainly a possibility.

How high is the moon? It is hard to judge, but I would be surprised if it was not at least
10 times as much as today. Is 100 times such a dream?

It is worth remembering that the total value of stocks on the NYSE and Nasdaq is $27
trillion. And more intriguing still, U.S. money supply is on $13 trillion. Then even more
interesting still, the U.S. national debt is around $20 trillion. So there is $27 trillion of
stocks, $20 trillion in bills but only £13 trillion in money.

Optically that does look right. $47 trillion in paper assets, not to mention hard assets
like land, real estate etc, but only $13 trillion in money? Money starts to look like a
pinch point to me.

Now could that be a reason for a hunger for usable currency… could there just not be
enough money about? Could the missing ingredient in the tepid world economy, which
doesn‘t seem to get either growth or inflation, be not enough M2 (let‘s call it money)?

Could there just not be enough money to get activity going? Has it all been sumped in
assets and higher technical solvency requirements?

If Gresham‘s law is true, and bad money drives out good, then governments better get
cracking and get the money out there and save us all from stagnation and/or Bitcoin. If
they don‘t, then cryptocurrencies will do the trick. ICOs anyone?

Bitcoin or no, it‘s a new dawn and you have to be in it and it‘s going to be wild.

Bitcoin has gone off the dial in the last few weeks, hitting above $2,700 a coin. It has
fallen back since, but the other cryptocurrencies have shot up in the aftermath.

Anyone who rode the dotcom boom will recognise the symptoms: up like a rocket and
down like a rock.

There will always be bubbles, history is full of them. Greed drives bubbles, and when
people see fortunes being made from apparently nothing they ultimately jump in blind
to get while the going is good.

This is the end.

Boom, bubble, bust is a cycle we are still in. Equities have boomed and will no doubt
bubble at the end of the cycle. Many say stocks are a bubble now, but when you look at
bitcoin charts you will clearly see what a bubble in full flight looks like.
You can‘t short bitcoin, which is probably a blessing in disguise, because the thing
about a bubble is, it‘s impossible to guess the top and shorting a financial panic, where
the crowd is rushing for the entrance not the exit, is a good way to lose a lot of money.

At least with a stock you can see there is an obvious problem with valuations. With
cryptocurrency there is no logic or much in the way of history to cling to.

A few things needs to be made clear. The first is that new financial instruments are the
authors of financial bubbles. In summary, no one really knows how they work and few
can value them correctly. The stampede of greed makes all that moot anyway. With a
new financial instrument, be it "options" for tulip bulbs, fiat money in the Mississippi
bubble of the 1700s, stock in the South Sea bubble, leverage in 1929 or collateralized
debt instruments in the credit crunch of 2007, the problem was the world was behind the
knowledge curve of the instrument and the power of greed drove the market wild and
finally into collapse.

Bitcoin is a new financial instrument and it is taking the same path.

The second thing is, and this is very important, tulips in Amsterdam remains a billion-
dollar industry to this day. The flotilla of new instruments that nearly sunk capitalism in
2007 are still trading in massive quantities today. Wall Street and the Dutch took a
painful lesson in how their instruments worked and fixed the problem.

Likewise bitcoin and numerous cryptocurrencies are here to stay. There are numerous
problems. Cryptocurrencies look a lot like CO2. To make a cryptocoin you have to burn
energy in what‘s called a "proof of work." Energy is fungible, and unless you are
driving your bitcoin mining rig with your own off-grid windmill, somewhere down the
chain a bitcoin is throwing off the CO2 of 40 barrels of oil.

But this won‘t stop bitcoin, nor will a huge crash in its value if it comes. OK, let‘s not
hedge, when it comes. Cryptocurrencies are here to stay and will be regulated and taxed
into shape. Yes, they said it couldn‘t happen to the Internet either, but it did.

Crytocurrencies, of which bitcoin is the leader, will fall back in value and more than the
fat drop bitcoin has already had.

The U.K. has about $100 billion dollars of bank notes in circulation. Meanwhile as I
write, cryptocurrencies have about $75 billion in currency out there. That is way too
much and will be the driver for a fall back.

Of course, this time it could be different, but that often proves to be the scariest
investment position to take.

By the way, don‘t forget to load up on bitcoins a few months after the crash, when
everyone says bitcoins and cryptocurrencies are dead. Because the survivors of the
crash, the Amazons and Apples of cryptocurrency, will come back and buying a crash is
so much better than buying the bubble , a lesson the new generation of equity investors
will some time in the future find out the hard way.

Disclosure: I do own bitcoins.

Clem Chambers is the CEO of leading private investors Web site ADVFN.com and
author of Be Rich, The Game in Wall Street and Letters to my Broker, in paperback and
on the Kindle.

Back in on May 31 I wrote part one of this article. The cryptocurrency markets
subsequently crashed.

Last week they roared back.

Bubble markets look the same, be they dotcom bubbles, single stock bubbles or Bitcoin.
They go up like a rocket and come down like a rock.

However, the point I was making was that massive companies will come out of these
emergent technologies, companies like Amazon, which came out of the dotcom crash.
The children of the cryptocurrency bubble will be colossal.

Where this bubble goes is impossible to guess, how high incalculable, but the take away
is: Tulip mania crashed horribly taking a large part of Dutch economic dominance with
it. Yet today tulips are still big business in Amsterdam. Bubbles are a phase not the
whole lifecycle of something new. A bubble is just the beginning of something big.

There will be crashes. There will be scandals. There will be ruin for many, there will be
those left behind moaning it isn‘t fair. There will be giant fortunes made. A new
industry will rise and a new generation of billionaires will spring from nowhere and
strut about. This will be a remake of an old movie.

What makes a bubble, does not disappear with it. Not tulips, not railways, not cars, not
Wall Street itself, not electronics, not computers, not the internet. Nor will blockchain
technologies or their offspring cryptocurrencies vanish.

After my article, Bitcoin, Etherium, etc. crashed and now they have bounced back.

I believe there is a huge lack of global M2 (money and near money) and this will drive
this private sector money supply success and it fills a vacuum left by government. The
U.S. has trillions less M2 than it has government debt; that imbalance is causing
cryptocurrency to fizz up into the void left by too little ‗official money.‘ It has happened
many times in history. When there is too little money, economics finds a way to make it
in the private sector.

Must Read: 12 Stocks To Buy For The Second Half of 2017

From an investment point you have to play this game. As an investor you have to jump
on in, skill up and learn. But how?

Let‘s start at the beginning. Make this call. Are cryptocurrencies going up or down in
the medium to long term?

I say up.

As such I can be serious about investing. I am building a broad portfolio of coins, over
time. I have about 20 different ones. Any of them could go to the moon or to nothing. It
is such crystalline speculation it makes me smile. I am gambling this is a hugely
positive sum game. If it is I will do well.

If the call is down, then you need to play these markets with a fist full of dollars and
trade it like a computer game with putting in so little money you don‘t care if you lose it.
Let‘s say $100. And you can.

Because cryptocurrencies have so many decimal points some of the coins out there are
effectively toy tokens. Yet they still have markets and can still be ‗mined‘ for ‗free coin‘
with your computer and played with in the same way as a $3,500 Bitcoin.

Every investor should at least do this, because they need to understand this world as it
will soon be a tide that will sweep all markets.

Blockchain technology is a fantastic new technology, it can be thought of as part

database, part cloud service, part political platform, but is at the heart a way to keep
records in a new way that has and adds significant and unique value.

Blockchain enables cryptocurrency and the value of Bitcoin and the universe of
Altcoins cascades from it.

For the investor, understanding cryptocurrencies unlocks the coming blockchain boom
that will and must hit the stock market soon. There is no blockchain dotcom-style stock
market frenzy yet, but it will come and understanding it will be very valuable.

Right now that frenzy is in ICOs (initial coin offerings), mainly unregulated
cryptocurrency flotations, and this thrilling madness will at some point spill into the old
highly regulated world of equities. Anyone who ‗gets it‘ when this happens will be set
to make fine returns.

Now a disclaimer. I am knee deep in cryptocurrency, if I mention it here I use it or I

own it. I own lots of different ones, which amounts to quite a chunk of change in total,
I‘m mining it like a nerd in a mania. ADVFN, the financial web site I run, is adding
more cryptocurrency content by the day.

TLDR: This is the big one for the next few years.
Continued from page 1

But what should someone who doesn‘t know anything, do? Firstly you need to kit up.

There are many sites in this game but the following ones are solid basic starting points.
However, at all stages remember this really is a wild west situation. There is no mummy
here and the environment is saturated with predators, chancers and fools. Navigating
this anarchy is where the big money is to be made and that will take experience.

That aside, you can start here.

Coinbase.com: You can buy and sell three of the big coins here. Just Bitcoin, Etherium
and Litecoin. You can even buy some with a credit card, an easy way to get rolling. The
site is U.S.-based and apparently raising money at a billion dollar market cap. In this
wild west, these guys seem low on the insane risk curve of this arena.

Bittrex.com: When Bitcoin spilt they got me my Bitcoin cash immediately allowing me
to dump it at $900 before it collapsed to $250. This was execution at a level many
didn‘t match. It meant I made good money from this crazy situation. The proof is in
performance in this game, the environment is pure ultra-risk and you have to evaluate
‗trustworthiness‘ as the key variable. Bittrex supports a plethora of coins, so you can
deep dive into the wild world of altcoins here.

CoinExchange.io: This exchange supports some really extremely small coins and this is
where I play coin with little or practically no value to practice at negligible risk.

NiceHash.com This is where a novice can mine. The NiceHash software will try to earn
you as much Bitcoin as your machine can grind out and every few days it will send it to
your Coinbase or other Bitcoin destination.

The fan on your computer suddenly blowing and your machine getting hot will probably
freak you out at first, but then receiving money for that is also a sobering experience.
You switch your computer on and you receive money passively. That is new and that is
a very, very important development.

You and your computer have gone from hitting the ASK of life to sitting on the BID
and getting paid. To me, ‗mining‘ is a clear example of how the blockchain changes
everything. Getting paid to run your computer opens a whole new economic chapter.

Getting yourself hooked up will push you a fair way up that extremely long and steep
learning curve.

Then you will be able to play the game at different levels.

Bitcoin is the big game. It trades billions a day, a transaction can cost from $1 up, so
you need to be thinking with that in mind if you are going to play with it.
But you don‘t have to play Bitcoin. You could play a minnow like Boatcoin or
Feathercoin, where $10 of coin gets you a long way, yet their markets can be traded like
any stock. For the cost of a Big Mac I‘ve played ‗market maker‘ on these coins. You
can ‗market make‘ coins like these like a Wall Street firm and push them around and
bully them like a ‗white shoe‘ firm would a Nasdaq stock.

It is remarkable, the financial markets you can trade on for essentially nothing, like
playing poker for match sticks. This is also an eye opener on many other levels. Stock
markets do the same for companies and extract hundreds of millions in tolls as do
brokers. At some point they will have to address that.

Once you have played the madness for a few dollars, you should be able to make your
mind up whether cryptocurrency is the next big thing. You will also now know a lot
more about blockchain and cryptocurrencies than most.

Obviously you know what I think.

My point is, investors need to start playing for penny ante stakes now, to skill up for
when this market breaks into the mainstream. When it does there will be a lot of money
to be made or lost.

With knowledge it will be much easier to be on the right side of those trades.

Bitcoin Mining: Textbook Example of Rent-Seeking

and Waste in the Financial Sector
The NYT gave readers an excellent example of how the financial sector can lead to an
enormous waste of economic resources. It reported on a massive set of sophisticated
computers in Iceland that is devoted to the sole purpose of "mining" bitcoins. The point
is that these computers are used to carry through complex algorithms more quickly than
competitors in order to lay claim to new bitcoins as they become available on the
markets.

While this can be quite profitable to an individual or firm that successfully claims a
substantial portion of the newly created bit coins, it provides nothing of value to the
economy as a whole. It is a case of pure rent-seeking, where large amount of resources
are devoted to pulling away wealth that is created in other sectors. This is the story of
much of the activity in the financial sector, such as high-frequency trading or the tax
gaming that is the specialty of the private equity industry, but in few cases is the rent-
seeking so clear and unambiguous. The NYT did a valuable service by presenting this
example.

*
What is bitcoin?

Bitcoin arrived on the scene in 2009. The digital currency is created and held
electronically. Its value stems partly from the fact that it's decentralized; no single
institution or government controls the network. It was developed based on a proposal
from a software developer called Satoshi Nakamoto, according to CoinDesk, which
tracks cryptocurrency prices and reports on events in the crypto space. Low transaction
costs are another feature along with instantaneous transfers.

Perhaps its biggest attraction is that its supply can't be increased or decreased at the
whim of a controlling entity. Similar to gold and other precious metals, bitcoins can be
"mined," but it's done by using computing power in a distributed network. And like gold,
bitcoin supply is limited. And it's headed toward terminal creation.

Bitcoin rules state that only 21 million bitcoins can ever be created, though the coins
can be split into smaller parts. That could make bitcoin, like gold, an attractive inflation
hedge, backers say. There are 16.67 million bitcoin in circulation now.

On the other hand, the potential creation of new digital currencies creates "the
possibility of limitless supply of different cryptocurrencies," undermining the value of
existing ones, UBS warned recently.

The Good: Digital currency needs a champion. The most exciting element of Bitcoin -- and most
dangerous for speculators -- is that technology is iterative and Bitcoin is only the first wave. While
there is a hard cap of 21 million Bitcoins available to be mined, the number of routes digital
currency can take are infinite. Alternative cryptocurrencies such as Litecoin, Peercoin and Namecoin
have been gaining traction by offering users separate systems of economic growth and even
simulating inflation. A mainstream competitor is already in the works, and the Let's Talk Bitcoin
blog recently uncovered a patent filed by JPMorgan Chase to develop a solution to the primary issue
of international online money transfers that independently produced digital currencies could
potentially solve.

The Bad: After you've bought your Bitcoin, there isn't much that you can do with
it. Bitcoin is a great idea. Publicizing it to people who may or may not fully understand the concept,
however, is a big reason for its explosive success. Instead of a separate form of currency, Bitcoin has
become a sort of volatile gold for would-be investors. Bitcoin has managed to pick itself up from
supposed 'crashes,' but that's not because of the inherent usefulness of the currency. In a Quora
post, Facebook co-founder Dustin Moskovitz said that while digital currency is a ripe pasture for
experimentation, the Bitcoin craze is 'overhyped.'

The Ugly: With legitimacy comes oversight. The initial interest in Bitcoin was driven by
crypto libertarians willing to invest their money and computer processing power into a decentralized,
self-limiting system of currency. The price of Bitcoin has, ironically, grown as the currency moves
further away from its fringe roots and into the public eye. The harbinger of Bitcoin's arrival into the
mainstream was a senate hearing that bumped the price of Bitcoin up to $750 on Nov. 16.

*
Bitcoin is a fraud that will blow up, says
JP Morgan boss
Bitcoin is a fraud that will ultimately blow up, according to JP Morgan boss Jamie
Dimon, who said the digital currency was only fit for use by drug dealers, murderers
and people living in places such as North Korea.

Speaking at a conference in New York, the boss of America‘s biggest bank said he
would fire ―in a second‖ anyone at the investment bank found to be trading in bitcoin.
―For two reasons: it‘s against our rules, and they‘re stupid. And both are dangerous.‖

He added: ―The currency isn‘t going to work. You can‘t have a business where people
can invent a currency out of thin air and think that people who are buying it are really
smart.

―If you were in Venezuela or Ecuador or North Korea or a bunch of parts like that, or if
you were a drug dealer, a murderer, stuff like that, you are better off doing it in bitcoin
than US dollars,‖ he said. ―So there may be a market for that, but it would be a limited
market.‖

Bitcoin is a virtual currency that emerged in the aftermath of the financial crisis. It
allows people to bypass banks and traditional payment processes to pay for goods and
services. Banks and other financial institutions have been concerned about bitcoin‘s
early associations with money laundering and online crime, and it has not been adopted
by any government.

It has more than quadrupled in value since December, hitting about $4,700 last month
before falling back. It fell by about 5% after Dimon‘s comments on Wednesday to
below $4,000.

―It is worse than tulip bulbs,‖ Dimon said, referring to a famous market bubble from the
1600s. He predicted big losses for those investing in bitcoin. ―Don‘t ask me to short it.
It could be at $20,000 before this happens, but it will eventually blow up,‖ he said.
―Honestly, I am just shocked that anyone can‘t see it for what it is.‖

However, the banker revealed his daughter had bought bitcoin: ―It went up and she
thinks she‘s a genius now.‖

Last week, Lady Mone launched a major property development in Dubai, priced in
bitcoins, saying the digital currency was a growing market that could not be ignored.
Bitcoin investors could lose all their
money, FCA warns
Read more

The co-founder of the underwear brand Ultimo is selling the luxury apartments with her
businessman boyfriend, Douglas Barrowman, and the £250m scheme will include two
apartment blocks and a shopping centre. One-bedroom apartments will be priced at
about 54 bitcoins, Barrowman said, while two-bedroom flats are expected to go for
about 80 bitcoins.

Meanwhile, a London property developer is allowing its tenants to pay their deposits in
bitcoin – the first time the cryptocurrency has been used in the UK residential homes
market.

By the end of this year the Collective will also accept rent payments in the virtual
currency. It said the move was in response to demand predominantly from international
customers.

Dimon‘s criticism of the currency coincided with a warning from the UK financial
regulator against a speculative frenzy in initial coin offerings (ICOs), where internet
start-ups are funded by investors using cryptocurrencies such as bitcoin.

Cryptocurrency boom stalls as regulators

focus on ICOs
Read more

In an ICO, an investor pays in bitcoins in return for a ―coin‖ or ―token‖ that is in effect
their share in the firm.

The FCA said anyone investing in ICOs should be prepared to lose all their money.
―ICOs are very high-risk, speculative investments,‖ it said. ―You should be conscious of
the risks involved … and prepared to lose your entire stake.‖

Yann Quelenn, an analyst at the online bank Swissquote, said bitcoin ―still has great
potential‖.
―We think it is a possible safe haven. Fewer than 0.01% of the world‘s population has a
bitcoin wallet,‖ he said. ―If this would reach 1%, the demand for bitcoin would
skyrocket, because there are only 18m coins available.

―Cryptocurrencies are a new asset class, one at war with fiat [paper] money, and that
war will be fought on regulatory issues. Central banks are keen to preserve their
monopoly on money, something they will not let go of without a fight.‖

7 reasons why you should not invest in bitcoins, cryptocurrencies

1. Extreme volatility
Investing in cryptocurrencies involves very high risk, as prices have been extremely
volatile. Many experts are sceptical about bitcoin as an investment primarily because
there is nothing for them to analyse. Vivek Belgavi, Partner and Fintech Leader, PwC
says, ―There isn‘t enough of an ecosystem surrounding bitcoins to allow fundamental
analysts to study it as an investment. People are therefore investing with imperfect
information and joining the h ..

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What is a cryptocurrency? Sometimes known as coins, cryptocurrencies are a 21st-century

creation — a mixture of digital assets, huge amounts of computing power and a network of
servers on which to store shared data. Unlike everyday money, they are decentralised —
meaning they are not issued or guaranteed by central banks and therefore fall outside the
purview of regulators. The currencies are secured against hacking by cryptography and can be
converted into real-world money anonymously. This has attracted some criminal elements, a
point emphasised by regulators and critics. Apart from bitcoin, other cryptocurrencies have
risen dramatically this year, including Ethereum, Ripple, Litecoin and Dash. They have different
characteristics, which allow users to treat them very differently. That, in turn, partly underpins
their appeal and valuations. Bitcoin sees itself as an alternative to central bank currency, while
Ethereum is “crypto-fuel” that is not to be used as a currency. Ripple, meanwhile, is software
aimed at financial markets, such as foreign exchange.

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share with others is a breach of FT.com T&Cs and Copyright Policy. Email licensing@ft.com to
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Why have prices rallied so dramatically? A mixture of scarcity, enthusiasm and — a big driver
of such investor manias — the fear of missing out. Many investors come from China, using
Japanese exchanges. For example, only a finite number of bitcoin — 21m — can be created.
There are 16.7m in circulation, according to data from Chainalysis, bringing bitcoin’s market
capitalisation to about $167bn. Of those in circulation, about 37 per cent have been spent or
traded in the past year, while about 22 per cent are being held by “strategic investors”, and
most of the rest have been lost. At the same time, enthusiasts, semi-institutional names and
even some hedge funds have sought to invest in cryptocurrency projects. Many have
embraced so-called initial coin offerings, a fundraising mechanism. “We think a large part of
the potential value of Ethereum is its role as the money supply for ICO,” said Bank of America
Merrill Lynch in a research note this month. The surge in bitcoin’s price has prompted some of
the world’s biggest market infrastructure providers to explore ways for customers to trade the
market using more traditional investment instruments, such as futures or contracts for
difference. Chicago-based exchanges CME Group and CBOE Global Markets are looking to list
bitcoin futures, a prospect that has helped lend legitimacy to bitcoin and fuel recent price
gains. With some marketing fanfare, spread betting and other online platforms have begun
offering crypto-derivatives to allow punters to buy and sell the market. What are the risks
associated with bitcoin? As comparisons abound with the Dutch tulip bubble of the 1600s,
national regulators have warned investors on the dangers surrounding a market that, to date,
has been unregulated, illiquid and prone to big swings in price that severely limit its use as a
currency for transactions. “Bitcoins are concentrated in very few hands, who owns a bitcoin is
not clearly defined, market manipulation is rife, and whether a transaction settles or not is
probabilistic, rather than legally certain and final,” said Preston Byrne, a structured finance
solicitor and founder of Monax, a blockchain software company. Higher prices mean that
holders of the currency — whether exchanges, trading platforms or retail punters — are a
more lucrative target for hackers. IG Group, the world’s largest online trading platform,
suspended trading of some of its bitcoin derivatives on Monday, citing the growing security
risk associated with offering the products. Like all asset classes, exiting the market is a crucial
factor. Some platforms and exchanges take the risk of a trade on to their books and pay out
customers from their own funds, until they can sell the currency on the market. If a fraction of
customers sold, that could put a stress on the market intermediaries, which do not have access
to credit at banks. And there are significant real-world problems. For example, the mining of
bitcoins this year has consumed more energy than the average electricity consumed annually
by 159 nations, according to Digiconomist. Can cryptocurrencies enter the mainstream of
finance? Bulls argue that once price stability has been achieved, bitcoin could feasibly be used
as a currency to denominate a transaction, rather than just for speculative gains. “The
infrastructure is coming in to deal with [this shift],” said Gavin Brown, senior lecturer in
financial economics at Manchester Metropolitan University and director of cryptocurrency
hedge fund Blockchain Capital. The process could take between 10 and 15 years, he said,
adding that a “regulatory light-touch approval” would be a necessary part of this development.
But critics warn bitcoin cannot be used as a medium of exchange or store of value in the
manner of central bank-backed money. Tara Waters, a fintech lawyer at Ashurst, said: “Central
banks may decide to adopt such technologies themselves, although it is likely they would
adapt the technology to better fit existing systems and norms.” Others fear the bubble could
burst, causing upheaval to those involved in the market. “I don’t think bitcoin has any business
in the mainstream financial system,” said Mr Byrne. “I am hearing anecdotal stories of people
maxing out credit cards and remortgaging their homes to buy bitcoin. Banks looking at it now
should mainly be focused on limiting their exposure.”

Slowdown of bitcoin

1. Bitcoin's blockchain loses its appeal

The real value with cryptocurrencies lies with their blockchains. At the beginning of
August, following a soft fork that saw bitcoin separate into two separate currencies
(bitcoin and bitcoin cash), bitcoin's blockchain was upgraded. This upgrade moved
some information off of bitcoin's blockchain in order to boost capacity and transaction
settlement times, as well as reduce transaction fees, in an effort to attract enterprises.

But what if bitcoin's blockchain fails to be a go-to option for businesses? Right now,
more than 150 organizations are currently testing a version of Ethereum's blockchain,
which supports smart contracts. These are protocols that help facilitate, verify, and
enforce the negotiation of a contract, and they provide marked distinction from bitcoin's
blockchain. If bitcoin's blockchain fails to differentiate itself and attract enterprises,
bitcoin's price could suffer.

Image source: Getty Images.

2. Brand-name businesses stop accepting bitcoin

Since 2014, a handful of brand-name businesses have accepted bitcoin as a form of
payment, with smaller merchants latching on in recent years. Some investors view this
growth in bitcoin's payment platform as a good reason to buy.

However, it could also be a source of investor frustration. If bitcoin remains volatile

(remember, it's had three declines of at least 29% in a very short period of time over the
past five months), there's the real possibility that merchants could bow out of accepting
the virtual currency. A potentially lengthy settlement period gives bitcoin time to move
against the grain, which could mean converting bitcoin into a lot less cash than when a
transaction was completed. If brand-name merchants bail on the virtual currency,
bitcoin's price could tumble.
Image source: Getty Images.

3. A double-edged sword of regulation

In some ways the regulatory environment for bitcoin has been a positive in 2017. Japan
began accepting the currency as legal tender earlier this year, and the CME Group
(NASDAQ: CME) -- operator of the world's biggest derivatives marketplace -- recently
announced that it would begin carrying bitcoin futures by the end of the year. These
moves help to validate bitcoin as an investment and a form of tender.

Then again, the regulatory environment can also keep bitcoin out of lucrative markets.
In September, both China and South Korea nixed initial coin offerings, with China
going a step further and announcing the eventual closure of domestic cryptocurrency
exchanges. Increased regulation could either help or hinder bitcoin.

Image source: Getty Images.

4. A cyber attack hits Bitfinex (or another

cryptocurrency exchange)
Another critical risk for bitcoin -- and all cryptocurrencies, for that matter -- is the
potential for a cyberattack. Four years ago, Mt. Gox, which was handling about 70% of
bitcoin's trading volume at the time, was hit by a crippling cyberattack. In the
bankruptcy filing from Mt. Gox just months later, it cited the theft of 850,000 bitcoin
(worth $6.8 billion today) and cash. In the two years following this cyberattack, bitcoin
wound up losing more than 80% of its value.

Today, cryptocurrency exchange Bitfinex handles around half of all trading volume for
bitcoin. If it were to be hit with a cyber attack, it could destabilize the market and send
bitcoin significantly lower.

Image source: Getty Images.

5. Margin mayhem derived from its CME listing

The recent announcement that the CME Group would begin listing futures for bitcoin
by year's end was viewed as a positive by many on Wall Street. The ability for Wall
Street firms to take a stake in bitcoin, without having to dabble in decentralized
cryptocurrency exchanges, could introduce new money and reduce volatility.

But there's another side to this story.

Futures trading will allow Wall Street to bet against bitcoin for the first time ever. It will
also allow all walks of investors to borrow on margin to enter those short positions. If
bitcoin's value were to swing violently up or down, it could lead to a flood of margin
calls that have the potential to destabilize the market for bitcoin. And because there's no
precedent for an asset like bitcoin, setting the margin limits is nothing more than
guesswork at this point.

Image source: Getty Images.

6. Investor emotions sack bitcoin

Last but not least, investor sentiment, which has been a crucial catalyst of bitcoin's
growth, could also push this virtual currency downward. Since bitcoin's inception,
individual investors have controlled its value. Compared to Wall Street investment
firms, retail investors are far more prone to allowing their emotions to influence their
investing decisions -- which rarely ends well. Many of bitcoin's wild price swings owe
to retail investors' piling into or bailing out of bitcoin based on the latest news. It
wouldn't take much for investor sentiment to shift and send bitcoin's value plummeting.

How does it work?

 Blockchain: The financial system to validate bitcoin transactions is known as
the blockchain, and depends on a decentralised network of computers connected
over the internet.
 Like peer-to-peer (P2P) networks where unidentified people upload and
download music and films, the blockchain depends on a growing community of
people and institutions online.
 Those peers run bitcoin software to verify bitcoin transactions, independent of
any bank or treasury.
 Every time people exchange bitcoin online, the whole network gets updated with
the new information, creating new "blocks", i.e. long chains of data for
computers to solve.
  Mining farms: As with printing new bank notes, new bitcoins are created by
solving "blocks" of mathematical equations that are created each time bitcoins
are exchanged online.
 Bitcoin software can crunch all those equations automatically, but it requires a
lot of computing power to do so. For this, large data centres known as "mining
farms", have been set up, with many of the largest farms located in Russia and
China.
 Blockchain.info counts 16m bitcoins in circulation, while there can only be up to
21m bitcoins. This limit is set in the Bitcoin algorithm.

Where can you buy it?

 Bitcoin exchanges. Bitcoins can be purchased through exchange operators
dedicated to cryptocurrencies, as well as traditional operators such as the
Chicago Mercantile Exchange (CME) and the Swissquote Bank, among others.
 In those public exchanges, bitcoin is traded under the XBT and BTC symbols.
Bitcoin Cash (BCH) is another cryptocurrency with its own price.
 CME's Bitcoin Reference Rate (BCC) is a spot price index used by CME and is
based on the daily bitcoin price on specialised exchanges such as Bitstamp,
GDAX, itBit and Kraken.

 Costs more than gold. At December's peak rates, a bitcoin cost as much as
$18,000. For this much, you could also buy over 400 grams of gold, at current
rates.
 In 2010, you could buy one bitcoin for less than $0.10. If you had invested $100
then, it would be worth millions today.

How safe an investment is bitcoin?

Investing in bitcoin would mean investing in the complex algorithms on which it is
based, and on the future of the peer-to-peer network that operates it.

Al Jazeera looked at the terms and conditions that an investor in bitcoin would have to
accept to buy bitcoin from a Swiss-based exchange operator. Here are some of the risks
that you would be accepting as an investor in bitcoin:

 Price volatility. The value of cryptocurrencies may change significantly even in

a single day, which would mean a capital loss of your investment.
 In December 2017, the price of bitcoin fell by 26 percent. If you had bought a
bitcoin on December 19, 2017, you would have paid $18,936 for each coin. But
if you wanted to sell it on December 23, buyers on the market were not willing
to pay more than $14,048 - a loss of $4,888 for each coin.
 In January 2018, the value dropped again by more than 10 percent, reaching the
$8,000 mark. In February, the price fell below $8,000 and was traded as low as
$7,574.20.
  Other virtual currencies, including ethereum and ripple, also fell sharply.
According to Coinmarketcap.com, this represented a drop of around $67.7bn in
24 hours.
 Cryptocurrencies lack the historical track record of other currencies or
commodities, such as gold, that could guide whether current levels of volatility
are typical or atypical.
 Hacking risk. On December 19, 2017, a South Korean cryptocurrency exchange
said it would file for bankruptcy after it was hacked for the second time that
year.
 Over $70m worth of bitcoins has reportedly been lost by several cryptocurrency
exchanges and miners, highlighting concerns about the security of such
currencies.
 "Hard fork" splits. Since the value of and support for the currency depend
entirely on the community using it, disagreement between the stakeholders may
result in the splitting of the network to support new competing cryptocurrencies,
this is known as a "hard fork".
 For example, Bitcoin Cash (BCH) is a hard fork from the original Bitcoin.
Effectively, BCH is now a different cryptocurrency from the original bitcoin,
inviting stakeholders to sell their "old" bitcoins and invest in this new one.
 The cofounder of the Bitcoin.com website, Emil Oldenburg, reportedly "sold all
my bitcoins recently and switched to Bitcoin Cash".
 Early stage technology. With advances in technology, cryptocurrencies are
likely to undergo significant changes in the future. How the existing
cryptocurrencies will cope, or benefit, from those changes is to be determined.
 There is also the risk of alternative technologies that could supersede existing
cryptocurrencies and make them obsolete.

Where you can use it

 Online stores that accept bitcoin. In 2014, Overstock became the first major
online retailer to accept bitcoin payments. Monoprix and Newegg also accept
bitcoin online payments.
 For travel. Latvian airlines AirBaltic and Air Lituanica accept bitcoin payments
for some of their flights.
 California-based online travel booking website CheapAir.com claims to have
completed more than $1.5m in bitcoin sales on flights, hotel bookings and
Amtrak railway bookings.

Secretary of the Commonwealth William F. Galvin today warned investors not to get
caught up in Bitcoin speculation.

"Bitcoin is just the latest in a history of speculative bubbles that most often burst,
leaving the average investors with a worthless product," Secretary Galvin said. "Going
back to the 1600s with tulip mania to the present Bitcoin craze, chasing the next best
thing will, more often than not, end in disaster for the average investor."
Bitcoin futures began trading on the Chicago Board Options Exchange (CBOE) on
December 10, 2017. Bitcoin has also been the target of major hacks at the exchange and
wallet levels, leaving many Bitcoin holders with huge losses. Because trading on the
CBOE gives Bitcoin an air of legitimacy, investors must be aware of the inherent risks
of investing in Bitcoin and the fraudulent schemes associated with it, Galvin's office
warned.

Bitcoin continues to attract intense media attention as the price of Bitcoin dips and soars.
Conflicting information about Bitcoin abounds, with some calling it a "craze" or a
"bubble" and others touting it as an amazing investment.

Before purchasing in Bitcoin, Secretary Galvin's office suggests investors consider the
following:

1. Bitcoin and other virtual currencies are not regular money, as they are not backed by
the United States or any other government or central bank.

2. Carefully investigate the seller before making a purchase of Bitcoin. You may want
to consider what recourse you would have, in case something goes wrong. Compare the
fees and costs associated with Bitcoin purchases and ask about the terms for redeeming
Bitcoin into regular money.

3. Virtual wallets used to store Bitcoin do not provide the same safeguards as deposits
made at a traditional banking institution. Unrecoverable losses can occur when Bitcoin
is stolen from these virtual wallets.

4. Bitcoin values fluctuate enormously and can do so in a very short period of time. Be
prepared for radical value changes in your Bitcoin investment, including single day
drops or increases in the thousands of dollars.

5. Bitcoin investing is generally considered to be speculation, since the value is not

related to any economic or financial parameters. Never speculate with money that you
cannot afford to lose.

6. Bitcoin and other virtual currencies are based on a public ledger called the
"Blockchain," which is still experimental and is subject to changes, errors, or criminal
activity which could adversely affect your virtual wallet or erase your Bitcoin value.

7. The unregulated and ambiguous nature of Bitcoin provides a fertile ground for
investment scams and other financial fraud, which can cause Bitcoin investors to lose
their money.

JP Morganbank has claimed that bitcoin will not be able to properly deal with a
liquidity crisis in the event of an economic shock.
In the US, when such shocks have occurred, central banks pump additional cash into the
economy to address declines in lending and spending in the private sector.

However, such a liquidity infusion would be close to impossible with bitcoin because
there is no central institution that controls the network and the number of coins released
each year is fixed at a certain rate.

JP Morgan stated: ―The ability to provide adequate liquidity is a hallmark of a well-

functioning market, but more so during times of crisis.

―One benefit of fiat money is that it can be used to provide emergency liquidity from
the outside.

―This is the role central banks play as the lender-of-last resort."

However, Bitcoin backers hit back at the claims made by the bank, arguing that their
case is built on the assumption that printing money to shore up an economy is
something that is beneficial.

Aaron Lasher, the chief marketing officer at cryptocurrency tech company Breadwallet,
said: "This is a classic case of creating the problem you offer to solve, and exactly why
bitcoin exists.

"Why do we have the need for "emergency liquidity" in the first place?"

Mr Lasher hit out at the fact economies are based on fiat currency which can be printed
at the whim of central bankers.

Mr Lasher said: ‖So banks have no incentives to manage liquidity risk precisely because
the marginal cost of printing more dollars by the central banks is zero, providing a
guaranteed backstop against sustaining losses incurred by excess risk taking.‖

Arthur Hayes, the chief executive peer-to-peer crypto trading platform BitMEX, also
argued that such policies ultimately translate into inflation in other financial assets.

He said: "If money printing solved the ills of economic collapse, Weimer Germany,
Zimbabwe, and most recently Venezuela would be the most productive and
economically sound societies on earth. Money printing delays the inevitable.

"Without the ability to print base money at all, any institutional that extended credit
would be evaluated by the market on its ability to responsibly originate loans."

Business Insider senior correspondent Pedro da Costa has, however, argued it is crucial
to make the distinction between countries with failing economies that print money
―willy nilly‖ and economically developed countries implement certain monetary policy.
He claimed: "The US is not Venezuela. "From a monetary standpoint, the US dollar is
the reserve currency.

―Venezuela is exposed to currency risk, needs to sell oil in dollars. Apples and oranges."

Cryptocurrency news: Wall Street

SOLVES massive Bitcoin flaw, says
economics professor
WALL Street may have managed to come up with a solution for one the
the biggest problems with the Bitcoin, a leading economics professor has
argued.

Professor Panos Mourdoukoutas, who is the Chair of the Department of Economics at

LIU Post in New York, made the claim in response to the argument that the volatility of
bitcoin could result in great financial losses should the digital currency fall against the
dollar.

Responding to the concern, he said: ―That‘s an old problem, which Wall Street has
solved recently with the introduction of Bitcoin Futures.‖

Futures are an agreement to purchase or sell an asset on a specific future date at a set
price.

When it comes to Bitcoin Futures, such agreements are based on the price of bitcoin and
speculators are able to put a ―bet‖ on what they think the price of bitcoin will be going
forward.

With Bitcoin Futures, investors can speculate on the price of bitcoin without actually
needing to own bitcoin.

Professor Mourdoukoutas added: ―Starbucks, Dunkin‘ Donuts, and any other merchants
concerned about this prospect [of suffering large financial losses] can short Bitcoin
Futures.

―This means that any losses in the spot market will be made up in the Futures market.‖

Professor Mourdoukoutas also argued that certain companies have been talking about
Bitcoin because accepting it as a form of payment for their products will create a buzz
for both companies among young customers who are fans of the digital currency.
His words have come at a time when in the past month 24 companies have referenced
the cryptocurrency in their analyst day conference calls, according to an analysis of
FactSet data.

Among those who discussed Bitcoin last month was Howard Schultz, the Executive
Chairman of Starbucks.

He said: ―I don‘t believe that bitcoin is going to be a currency today or in the future.‖

However, he stressed that blockchain technology could become a central technology to

businesses over a 20-year timespan.

He added: ―I am not bringing this up because Starbucks is announcing that we are

forming a digital currency or we‘re investing in this.

―I am bringing this up because as we think about the future of our company and the
future of consumer behaviour, I personally believe that there is going to be one or a few
legitimate, trusted digital currencies off of the blockchain technology.‖

The fact that major companies are discussing Bitcoin highlights the degree to which the
cryptocurrency has become a massive point of economic interest.

At present, the value of one Bitcoin equals that of approximately £7,375.

Joseph Stiglitz believes that Bitcoin is simply unnecessary. He told Bloomberg TV that
it is attempting to solve a problem that never existed, according to investing.com

Learn how to buy Bitcoin and Ethereum safely with our simple guide!

―We have a good medium of exchange called the dollar…we can trade in that. Why do
people want bitcoin? For secrecy. The banking system can and is already moving
toward greater use of digital payments, but you don‘t need bitcoin for that,‖ said Stiglitz.

Talking in Davos, Switzerland, where the World Economic Forum is to be held, Stiglitz
explained that in his opinion, the only advantage to the system is secrecy. Thus, as
cryptocurrency becomes more mainstream, it will negate itself: ―So by regulating the
abuses you are going to regulate it out of existence,‖ he said.

Joseph Stiglitz is an American economist and a professor at Columbia University. A

Nobel laureate and former chief economist of the World Bank, he was named one of the
100 most influential people in the world by Time magazine in 2011. His books include
“Globalization and Its Discontents Revisited”, “The Euro and Its Threat to the Future
of Europe”, “Rewriting the Rules of the American Economy”, and “The Great Divide”.
Opinions such as these have been far from uncommon amongst public figures, but
generally scepticism has been either from members of the financial establishment that
feel a threat to their monopoly, and government agents who fear a market crash and/or
loss of tax revenue.

The other day my barber asked me whether he should put all his money in Bitcoin. And
the truth is that if he‘d bought Bitcoin, say, a year ago he‘d be feeling pretty good right
now. On the other hand, Dutch speculators who bought tulip bulbs in 1635 also felt
pretty good for a while, until tulip prices collapsed in early 1637.

So is Bitcoin a giant bubble that will end in grief? Yes. But it‘s a bubble wrapped in
techno-mysticism inside a cocoon of libertarian ideology. And there‘s something to be
learned about the times we live in by peeling away that wrapping.

If you‘ve been living in a cave and haven‘t heard of Bitcoin, it‘s the biggest, best-
known example of a ―cryptocurrency‖: an asset that has no physical existence,
consisting of nothing but a digital record stored on computers. What makes
cryptocurrencies different from ordinary bank accounts, which are also nothing but
digital records, is that they don‘t reside in the servers of any particular financial
institution. Instead, a Bitcoin‘s existence is documented by records distributed in many
places.

And your ownership isn‘t verified by proving (and hence revealing) your identity.
Instead, ownership of a Bitcoin is verified by possession of a secret password, which —
using techniques derived from cryptography, the art of writing or solving codes — lets
you access that virtual coin without revealing any information you don‘t choose to.

It‘s a nifty trick. But what is it good for?

In principle, you can use Bitcoin to pay for things electronically. But you can use debit
cards, PayPal, Venmo, etc. to do that, too — and Bitcoin turns out to be a clunky, slow,
costly means of payment. In fact, even Bitcoin conferences sometimes refuse to accept
Bitcoins from attendees. There‘s really no reason to use Bitcoin in transactions —
unless you don‘t want anyone to see either what you‘re buying or what you‘re selling,
which is why much actual Bitcoin use seems to involve drugs, sex and other black-
market goods.

So are Bitcoins a superior alternative to $100 bills, allowing you to make secret
transactions without lugging around suitcases full of cash? Not really, because they lack
one crucial feature: a tether to reality.

Although the modern dollar is a ―fiat‖ currency, not backed by any other asset, like gold,
its value is ultimately backed by the fact that the U.S. government will accept it, in fact
demands it, in payment for taxes. Its purchasing power is also stabilized by the Federal
Reserve, which will reduce the outstanding supply of dollars if inflation runs too high,
increase that supply to prevent deflation. And a $100 bill is, of course, worth 100 of
these broadly stable dollars.

Bitcoin, by contrast, has no intrinsic value at all. Combine that lack of a tether to reality
with the very limited extent to which Bitcoin is used for anything, and you have an asset
whose price is almost purely speculative, and hence incredibly volatile. Bitcoins lost
about 40 percent of their value over the past six weeks; if Bitcoin were an actual
currency, that would be the equivalent of a roughly 8,000 percent annual inflation rate.

Oh, and Bitcoin‘s untethered nature also makes it highly susceptible to market
manipulation. Back in 2013 fraudulent activities by a single trader appear to have
caused a sevenfold increase in Bitcoin‘s price. Who‘s driving the price now? Nobody
knows. Some observers think North Korea may be involved.

But what about the fact that those who did buy Bitcoin early have made huge amounts
of money? Well, people who invested with Bernie Madoff also made lots of money, or
at least seemed to, for a long time.

As Robert Shiller, the world‘s leading bubble expert, points out, asset bubbles are like
―naturally occurring Ponzi schemes.‖ Early investors in a bubble make a lot of money
as new investors are drawn in, and those profits pull in even more people. The process
can go on for years before something — a reality check, or simply exhaustion of the
pool of potential marks — brings the party to a sudden, painful end.

When it comes to cryptocurrencies there‘s an additional factor: It‘s a bubble, but it‘s
also something of a cult, whose initiates are given to paranoid fantasies about evil
governments stealing all their money (as opposed to private hackers, who have stolen a
remarkably high proportion of extant cryptocurrency tokens). Journalists who write
skeptically about Bitcoin tell me that no other subject generates as much hate mail.

So no, my barber shouldn‘t buy Bitcoin. This will end badly, and the sooner it does, the
better.

Bitcoin faces a global backlash from regulators and

governments
 India‘s finance minister said this week that the country does not recognise
cryptocurrencies as legal tender and would take action against their use in
funding ―illegitimate activities‖.

 US regulators are investigating the Bitfinex exchange and a cryptocurrency

company called Tether. They are questioning whether tether, whose coins are
used to trade digital currency, are backed by US dollars as it claims.
  Facebook has banned bitcoin and other cryptocurrency adverts on its site.

 South Korea announced at the end of December that it was planning a

crackdown on trading in the digital currency, preparing a ban on opening
anonymous cryptocurrency accounts and new legislation to enable regulators to
close coin exchanges if they felt there was a need to do so.

 UK prime minister Theresa May said last week she was concerned that criminals
were taking advantage of digital currencies. ―In areas like cryptocurrencies, like
bitcoin, we should be looking at these very seriously,‖ she said.

 Steven Mnuchin, US treasury secretary, signalled that bitcoin and

cryptocurrencies would be subject to greater regulatory scrutiny in the world‘s
largest economy.

Why bitcoin could trigger the next global

financial crash
Cryptocurrencies like bitcoin are speculative derivatives with nothing to back them up,
and that poses a danger to financial system

Ben Bernanke, Federal Reserve Chairman, May 2007

When I was a boy, a share was a share. It was a tiny portion of a company based around
a piece of paper that said that you owned a tiny part of the company in its entirety and in
perpetuity. It is in fact a derivative contract first removed.

Some countries allow company owners to sell shares without the voting rights,
devaluing the shares in the eyes of investors. Nevertheless, when the red mist comes
down, investors soon forget about the vote and go merely for a share in the profits (and
losses) of the company. The authorities in Hong Kong are close to allowing company
owners to keep the votes and large amounts of listing cash to encourage them to list
here. Greed on all sides is the key emotion of a bull market at this stage of the economic
cycle.

Declining standards and increasing risk are natural bedfellows of greed. Investors go crazy,
doubling up for fear of missing out. They invest borrowed money. Scorpion products are
developed which are nasty, poorly understood instruments with a sting in their tail that have
the potential for sudden monumental losses. In the mid 1990s, the billionaires of Indonesia
borrowed US dollars at 5 per cent and lent it in rupiah at 22 per cent. After the crash of the
latter against the former, they found that they had made a small fortune – out of a large one.
Declining standards and increasing risk are natural bedfellows of greed. Investors go
crazy, doubling up for fear of missing out. They invest borrowed money. Scorpion
products are developed which are nasty, poorly understood instruments with a sting in
their tail that have the potential for sudden monumental losses. In the mid 1990s, the
billionaires of Indonesia borrowed US dollars at 5 per cent and lent it in rupiah at 22 per
cent. After the crash of the latter against the former, they found that they had made a
small fortune – out of a large one.

Synthetic financial products built from derivatives, like accumulators, were typical of
the last bust in Hong Kong. Useful for some professionals, deadly for most – but seemed
like a good idea at the time. Derivatives are contracts whose value depends on the
leveraged movement of an underlying share, or other asset. A share is a first-order
derivative where you can get profits and dividends from the company. These second-
and third-order derivatives are merely backed by contracts and the credit worthiness of
those involved. Bull markets build a house of cards based on layers of debt and
excessive trust.

The next crash will not come because of some jiggery-pokery with voting rights or even
accumulators; that is so last crash. This time it is likely to be around derivatives, of
which the juiciest candidate is bitcoin and the other cryptocurrencies.

Bitcoin has had a poor year. In 2013 it gained 5,500 per cent, it is only up 1,700 per cent
so far this year. The charts say that it could fall 80 per cent and still be in a bull market.
It is the biggest bubble in the shortest period of time, perhaps even including the tulip
bubble of 1636 to 1637.

Bitcoin is NOT a currency, for currencies do not have intrinsic value. Bitcoin is not an
asset, such as gold. Gold has an intrinsic value confirmed over millennia of human
civilisation. There is always a chance that gold will buy you something – even during
the horrors of the holocaust.

Bitcoin is a derivative – an artificial creation based on a series of promises that one

person gives to another. It is seen as an attribute that nobody knows who gives the
promise; yet dangerously, everybody assumes it is there. None of these promises
implies payments, as does a share. The only value is that another buyer/investor/sucker
will pay more today to take it off your hands. Bitcoin is the Kardashian of the industry;
it is going up because it is going up – this is the Last Fool investment.

Bitcoin is for the time being a real investment. The Chicago-based exchange, CBOE,
launched bitcoin futures on Monday allowing investors to bet on the price bitcoin might
be in the future. The futures surged more than 20 per cent over the spot price, the
system had to be periodically halted, and the regulators murmured about risk. CBOE is
not the first. You can already leverage bitcoin 15 times on the Japanese bitcoin
exchange bitFlyer, potentially driving the size of the bitcoin market up to US$4 trillion
– that‘s already half the size of Japan‘s M2 money supply.
This bull market is not different. Again, we see regulators not enforcing their own
regulations (except in China), we see investors layering layers of derivative upon
derivative, debt upon debt, and we see speculation of subprime levels where anyone can
invest. An unchecked bitcoin is now big enough to become a systemic risk to the global
economic system.

If the bitcoin bubble bursts, this is what

will happen next
The way media and experts are nearly universally labelling bitcoin‘s vertiginous price
surge a ―bubble‖ is just another bizarre episode in the cryptocurrency‘s odd saga.
Generally, bubbles are not called as they happen. Like financial Rumpelstiltskins, the
moment you dare speak their name, they either have already burst or are very close to
doing so.

―Bubbles usually get identified in retrospect,‖ says William Derringer, an MIT historian
who has extensively researched financial bubbles. ―If we knew with absolute certainty
that Bitcoin‘s was a bubble, it would have already popped.‖

Apart from the popping part, though, bitcoin‘s hike ticks almost all the boxes on the
bubble checklist. Like bitcoin‘s surge, Deringer explains, most bubbles erupt off the
back of novel technologies (think of the dot.com bubble in the noughties), often coupled
with some form of financial innovation; bubbles also swell as a result of constant media
coverage, which causes more and more FOMO-riddled investors to join the craze; and,
of course, you have a bubble when speculation drives an asset‘s price tremendously
above its fundamental value (that‘s tricky with bitcoin, as we can‘t tell what the
fundamental value of a string of cryptographic code is.)

Investors don‘t seem to care about the red flags. Bitcoin‘s price has soared from January
2017‘s $800 to today‘s $17,000, with plenty of ups and downs on the way. The debut of
bitcoin futures on two major exchanges – initially expected to bring down Bitcoin‘s
price by allowing investors to short it, i.e. bet against it – has ended up giving the
cryptocurrency more legitimacy among retail investors, further boosting its price.

Read next

 These are the Bitcoin alternatives to watch in 2018

These are the Bitcoin alternatives to watch in 2018

 By Sian Bradley

All the same, it‘s worth wondering what could happen if bitcoin crashed. If, in other
words, bitcoin‘s price really was in a bubble, and the bubble popped – whatever the
reason (hack, state crack-down, market manipulation). How bad would that be? And
how would it play out?

Some think that, as things stand, the harm would be limited. While investors are
increasing by the day, most of bitcoin‘s estimated $366.8 billion market value is held by
a handful of super-rich, ranging from early adopters, to Silicon Valley bigshots and coin
barons running cryptocurrency mining operations.

―Most of bitcoin‘s value is held by a few thousand very, very wealthy people who
would simply become a bit less wealthy. I would expect no meaningful general impact.‖
says Ari Paul, an analyst and chief information officer for cryptocurrrency investment
firm BlockTower Capital.

But some collateral damage would be inevitable. A sudden fall in bitcoin‘s price may
put pressure on exchanges – companies converting Bitcoin to state-sponsored currency
like dollars or pounds – with hordes of coin-owners trying to cash out of their bitcoins
before a further slump in value. This reverse stampede, compounded by many
exchanges‘ notorious lack of liquidity, might leave more than a few casualties on the
field.

―It will be like 2000, when the tech bubble popped,‖ says Garrick Hileman, who
researches monetary systems at the University of Cambridge. ―The largest and strongest
players, the Amazons of the crypto world, will consolidate and propel themselves
further ahead. But a lot of bitcoin companies – exchanges, wallet companies, etcetera –
will go out of business.‖

Some of them could make a last-ditch attempt to pivot. Remember 2014, when, after the
collapse of Japanese Bitcoin exchange Mt Gox, people forgot about disgraced bitcoin
and started waxing lyrical about the blockchain? ―The cycle could repeat itself,‖ says
Hileman.

There may be contagion. Cryptocurrencies such as Ethereum, Litecoin and Monero that
have rocketed throughout the current surge could wind up being tarred with the same
bitcoin brush and fall in value. According to Hileman, companies making hardware to
mine bitcoin and other cryptocurrencies are similarly bound to get a drubbing in a post-
pop scenario. ―Nvidia, Intel and other chip-makers are definitely exposed,‖ he says.

Hileman and Paul concur (together with several other economists) that a grave, 2008-
style crash is a far-fetched possibility. Past systemic crises were fuelled by people
getting in debt to fund their investment. ―To have a major financial bubble you'll need a
lot of lending and credit to build up,‖ Hileman says – and he does not think bitcoin has
witnessed that just yet.

But that may already be changing. Cryptocurrency entrepreneurs have already started
speaking at industry conferences about the necessity for ―leverage‖ , ―lending‖ and
―credit.‖ Just days ago, the FT revealed that Japanese crypto-exchange bitFlyer let
investors borrow 15 times their cash deposit to buy bitcoin. And let‘s not even mention
the anecdotes about people remortgaging their houses to buy a slice of the bitcoin cake.
A bigger, lending-driven, bubble might affect more than a couple crypto-millionaires‘
wallets.

Whatever its severity, a bubble-pop would have at least one consequence: more
regulation. As an increasing number of people – and even institutional Wall Street
investors – join in the bitcoin mania, financial authorities worldwide will adopt a more
interventionist stance. In fact, this is already happening: South Korea held a meeting on
bitcoin two weeks ago and this week France‘s minister of finance demanded that the
G20 discussed stricter bitcoin regulation. A bitcoin crash would only precipitate what is
underway, explains Brent Goldfarb, an associate professor of management at the
University of Maryland.

―It would create regulatory pressure on the currency,‖ he says. There would be an
upswing in complaints and political pressure to do something about [bitcoin]. That's
what created the US Securities and Exchange Commission, which was established after
the crash of 1929.‖

Granted: enforcing regulation on a digital currency designed to be borderless, stateless,

and anonymous would certainly prove tough. One obvious thing for governments to do
would be impose stricter rules on cryptocurrency exchanges in a bid to avoid the
excesses we are witnessing right now. Will that work? Probably not for hardcore
bitcoiners. But, Goldfarb thinks, retail investors of the get-rich-quick type would steer
clear, at least initially.

Bitcoin itself may go back where it was born, among libertarians, crypto-enthusiasts,
and darknet spelunkers. Or might be dethroned by another cryptocurrency, one less
tainted by bubbly memories, and end up in digital purgatory. But it will not die. Just
think of tulips, the unwitting protagonists of a speculative bubble in 17th century
Netherlands. ―Tulips didn't disappear after the mania ended,‖ Goldfarb says. ―They are
a key part of Dutch economy even today.‖

Bitcoin is different. Bitcoin owners don't get interest, dividends, or other benefits from
holding bitcoins. It's like a technology stock that's going to be pre-revenue forever. And
this makes it less obvious what kind of developments could cause investors to have
second thoughts.
Goldfarb compares bitcoins to assets with "artificial scarcity" like fine art. "It'll have
value so long as people believe it has value," Goldfarb says.

We shouldn't take this line of argument too far, however. Bitcoins don't pay dividends,
but their value can be pushed upward if a lot of people start using the Bitcoin network.
The supply of bitcoins is permanently capped at 21 million. So if a lot of people want to
make payments over the Bitcoin network, the value of bitcoins will need to rise (or at
least stay at high levels) to accommodate that demand.

The other, weirder possibility is that bitcoins could prove to be a digital version of gold.
Gold's value defies conventional market analysis in much the same way bitcoin's value
does. Gold doesn't pay a dividend and only about 60 percent of the world's gold supply
is devoted to jewelry or industrial use.

A lot of gold is held in vaults and under floorboards as a long-term store of value and a
hedge against inflation and global turmoil—and this kind of speculative trading has a
big impact on gold's price. If enough people continue believing that gold is a good
investment, this becomes a self-fulfilling prophesy.

Something similar could be happening with Bitcoin. Bitcoin now has a large subculture
of "hodlers"—a deliberate, whimsical misspelling of "holders"—who make it a point of
pride that they hold on to their bitcoins as a long-term investment regardless of short-
term market fluctuations. The hodler ideology could be self-fulfilling in much the same
way that goldbug ideology is: the more people who come to believe that bitcoins are a
good long-term store of wealth, the more it will be a good long-term store of wealth.

How it began
Established in 2009 after the financial crash, bitcoin is a digital currency that has no
central bank or regulatory authority backing it up. The coins don‘t exist in a tangible
form but are made by computers and stored in a digital wallet or on the cloud. They
can then be exchanged and used in transactions.

There is a finite number of bitcoin that can be supplied – 21m – and there are currently
15m in circulation. Its price has fluctuated wildly since it was launched. Seven years
ago, two pizzas were bought for 10,000 bitcoin. At its peak at the beginning of
September this year each bitcoin was worth almost $5,000. As it can be used as an
anonymous way to carry out cross-border money transfers, it has been linked to drug
dealing and money laundering.

There are bitcoin ATMs that allow the cryptocurrency to be exchanged for cash, and an
increasing number of businesses accept it. Lady Mone, co-founder of underwear brand
Ultimo, launched a property development in Dubai with prices in bitcoin, while a
London property developer is to allow its tenants to pay their deposits using it.
Growing interest
The renewed attention on bitcoin has led to a spike in interest from people wanting to
invest. ―BTC [bitcoin] and crypto[currency] more broadly have hit the mainstream
consciousness,‖ says Lex Deak, chief executive of alternative investment aggregator
Off3r. ―I am getting an increasing number of enquiries from late adopters who want to
learn more about accessing investment opportunities in the space. It has matured rapidly
since the beginning of the year, courtesy of the jump from $1,000 to over $4,000, with a
feeling that there is now a little less volatility.‖

I have heard of people moving their life investments into bitcoin and this is a bad idea

Marc Warne, Bittylicious

Guy Halford-Thompson, the founder of brokerage Quickbitcoin, says he would not be

surprised if mainstream brokers and investors started to invest heavily in the near future.
At the same time, the financial regulator has warned against a speculative frenzy over
initial coin offerings (ICOs) – a digital way of raising funds from the public using
cryptocurrencies such as bitcoin – because of their unregulated nature and lack of
investor protection.

While some investors may be attracted by the massive rises this year, others will be
wary of the volatility. In mid-January one bitcoin was valued at $800. By June this had
gone to $3,000. One month later, it was at less than $2,000 and then almost $5,000 by
the start of September. Two weeks later, it was at $3,200.

―Whether it is suitable or not is down to individual circumstances,‖ says Deak. ―If you
are an experienced investor with a balanced portfolio and relatively small exposure,
then BTC is an exciting and potentially lucrative investment. It needs to come with a
clear warning that there is potential for significant losses and investors need to carefully
consider the method of investing.‖

Tread carefully

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Electronic payments expert Dave Birch has said in the past that ―one doesn‘t invest in
bitcoin, one gambles on bitcoin‖. Those working in the area advise anyone planning on
buying the currency to only invest as much as they are prepared to lose.

―The general sensible view is that the more volatile the investment, the smaller
proportion of your wealth you should consider storing in it,‖ says Marc Warne, founder
of bitcoin exchange Bittylicious. ―I have heard of people moving their life investments
into bitcoin and this is a bad idea.

―The flipside is simple – why not give it a try? If you have £20 to spare, for instance,
buy a tiny amount and track its price. If something goes hideously wrong the £20 can be
written off and it can be considered a learning experience. If you can, spend it
somewhere like at a few pubs that accept it.‖

Because the typical protections surrounding investment are not present with bitcoin,
prospective investors should ask for help from those who have traded in them already,
says Halford-Thompson. ―My advice to anyone thinking about investing in bitcoin is to
do their own research, but also to speak to people who have already gone through the
experience of investing in it,‖ he says.

―Most of the dangers are because the protection that investors would normally enjoy on
a stock market are not present. If you own bitcoin, you need to make sure you know
how to buy, sell and store it properly or you risk losing your entire investment.‖

Don’t let the bankers fool you: bitcoin is

here to stay
Dominic Frisby

Read more

Is it secure?
Concerns about the security of the cryptocurrency have continued to shadow it. Last
year, almost 120,000 bitcoin worth around $78m (£58m)were stolen from Hong Kong-
based Bitfinex, one of the most popular cryptocurrency exchanges, which resulted in a
20% drop in the value of the currency at the time.

―Similar to online banking, people need to take care with their bitcoin account
credentials,‖ says Nwosu. ―Whether you secure your bitcoin yourself or with a third
party like Coinfloor, we recommend the safest way to go is to keep your security
credentials offline.‖

Daniel Scott of Coincorner says the currency itself is secure, but the problem surrounds
businesses in the industry and the wallets where the bitcoin are stored. ―Unfortunately,
IT security is a real-world issue, not just for bitcoin but within any industry that uses
technology. You only have to do a quick Google search for recent hackings of large
global companies to see that any company is open to security issues regardless of size or
industry.‖

AS RISKY AS TULIPS
When Jamie Dimon, CEO of JP Morgan, dismissed bitcoin as a currency for drug
dealers and murders that would end up imploding, he compared its rise to an infamous
bubble from the 1600s. ―It is worse than tulip bulbs,‖ he said.

Dimon was referring to one of the most notorious periods of speculation in history when
the value of tulip bulbs rocketed amid a mania for the flowers. The popularity of the
bulbs hit its peak in the 1630s.

They were traded ―frantically‖, according to the Rijksmuseum in Amsterdam, and some
people even put their homes down as collateral. However, the market crashed in
February 1637, leaving many investors penniless.

I first seriously heard about cryptocurrency while I was working on Wall Street.

This was in 2013. I was trading Argentine credit. One of my local brokers in Buenos
Aires wanted to know if I had knew anything about bitcoin. Argentina, at the time, had
been locked out of capital markets for over a decade. The peso, ostensibly pegged to the
US dollar, traded at a discount on the ground, leaving locals hungry for other stores of
value. Capital controls meant that getting money offshore often involved suitcases and
ferries to Uruguay. The country was on the brink of another default.

The promise of bitcoin, in this context, was a store of value that would not be captive to
the ineptitude or harm of a single, central authority.

As I dug further into bitcoin, more promises of an alternative, improved financial

system presented themselves. The European debt crisis, and specifically the asset
seizures in Cyprus, highlighted the significance of a digital store of value that could be
owned directly - that could not be compromised by an external actor.

Here was an asset that did not demand an intermediary. Sitting on a trading desk at the
time, the removal of rent-seeking middlemen from the system was particularly
compelling. This technology could allow counterparties to interact directly, without
having to disclose the details of their transactions or identities to third parties.

This was also an asset that was programmable. As a derivatives trader, I spent a lot of
time thinking about counterparty exposure, collateral and capital requirements. Could
smart contracts provide an automatically enforceable means of accounting for this sort
of systemic risk?

It had not taken me long to grow disillusioned with the old financial system. Insider
trading went on at scale. Reckless risk-taking was often rewarded. Market manipulation,
under the guise of many different names, remained rampant.

Cryptocurrency promised an alternative to this system.

For many, 2017 will be the year that they first seriously heard about bitcoin. As I
consider the state of cryptocurrency today, however, I don't see many fulfilled promises.

Instead, we have constructed around crypto a warped version of the legacy financial
system, with all the familiar players: issuers, broker dealers, exchanges and custodians.
Along with these players come the legacy problems of centralized control,
intermediation, systemic risk, market malpractice and - importantly - short-term greed.

We may think that we are down the crypto rabbit hole, but really we are through the
Wall Street looking glass.

Issuers
Cryptocurrency tends to be marketed as "trustless." A truer way of thinking about it is
that can replace the necessity of trusting a single, central authority with the ability to
trust a network of decentralized actors.

Many of the tokens that have emerged in the last year, however, have been issued by
small teams of entrepreneurs, who must be trusted to get the project off the ground.
Thanks to the cryptocurrency community's emphasis on open source development, later-
stage work often proceeds in a more decentralized manner.

Nonetheless, investors and consumers need to reconcile the dissonance between the
sales pitch of decentralization and the reality of how these projects are often run in their
early days.

The paradox of centralized cryptocurrency creation is perhaps nowhere so clearly on

display as in Venezuela. The Venezuelan president, Nicolas Maduro, announced a few
weeks ago his intent to issue a cryptocurrency, presumably in order to evade sanctions.
This is unlikely to work, but it also misses the point. A promise of bitcoin is to act as a
store of value that would not be captive to a central authority.

A new Venezuelan cryptocurrency, if issued by Maduro, is just as likely to be

mismanaged as the bolivar.

Other assets also make this point. Tether is an example of a centrally-mismanaged token.
It claims to be a fully-collateralized, dollar-backed asset. The fact that it is not
redeemable, coupled with the opaque and problematic accounting practices of its issuers,
however, makes it as questionable as any of Wall Street's financial creations, if not
more so.

Decentralization is a transformative concept in finance and technology. But if the source

of value for these products still relies on a central issuer, then how different are they
from the financial products that Wall Street has been devising for decades?

Intermediaries
Cryptocurrency is also talked about as a disintermediating technology. The peer-to-peer
nature of blockchain-based assets is perhaps their most interesting feature.

The reality of how these assets are generally being transacted and custodied, however, is
highly intermediated.

The professionalization of the issuance process is one example of cryptocurrency

markets replicating the legacy system. The services provided by investment banks in
equity capital markets are now getting packaged and sold to teams of entrepreneurs
looking to do token sales.

These services include running diligence on investors, book-building, addressing

compliance concerns and handling the legal process. On the one hand, this marks an
important initiative in maturing the market. On the other, it is recreating Wall Street's
system around this new asset class.

The platforms that facilitate the buying and selling of cryptocurrencies and tokens also
fit this category. The development of over-the-counter trading desks in cryptocurrency
feels particularly ironic for me, given I first really understood bitcoin's value proposition
while sitting on a trading desk myself. These desks and exchanges undoubtedly play
critical roles in providing liquidity to the market, but in many ways they are replicating
what we knew from the old system.

For this reason, decentralized exchange is one of the most compelling areas of research
in the space. Rather than rebuild the legacy exchanges, decentralized exchange seeks to
enable a new way of transacting that is truer to the value proposition of the technology.

Wallets, like exchanges, have been significant in driving adoption of, speculation on,
and use of cryptocurrency. Interaction with private keys remains a real user experience
challenge. While many do choose to self-custody their cryptocurrencies, and the very
option to do so is one of the important features of this asset class, we have yet to see a
product enable secure and reasonable private key custody without reliance on third
parties.

In place of this, the industry has again created mirror images of the legacy system:
professional custody services using everything from safe deposit boxes to Swiss bank
vaults.
These mirror images of Wall Street have a distorted quality. Not only do they
imprecisely (or immaturely) resemble the old financial infrastructure on which they are
based, but they also bend and corrupt the original intent of the product. Cryptocurrency
has created more intermediaries than it has displaced.

The intent was to give people direct control of their funds, free from seizure from banks
and governments. Instead, people are handing over that control to a new class of actors--
who are frequently even less accountable than their old school counterparts.

Institutions
The question of institutional accountability speaks directly to another promise of
cryptocurrency. With its capacity for programmability, crypto can enforce financial
contracts. This could solve issues of collateral management and guarantee compliance
with capital requirements. The 2008 financial crisis was exacerbated, in part, by a lack
of clarity about exposures among counterparties. Auditability and enforceability
inherent to crypto should help mitigate, or at least reveal, this kind of systemic risk.

However, the third parties that have been created around cryptocurrency equally
exposed to each other as banks, exchanges, and custodians were in 2008.

Commingling of funds within wallets and exchanges, opaque accounting, cross-

exchange exposure and unclear margin requirements are a few of the sources of
institutional risk in the market. The relative lack of standards in cryptocurrency means
that these risks are poorly studied and understood. Disclosures on the subject have yet to
be widely demanded by customers and are far from commonplace.

The nascent infrastructure growing up around cryptocurrency reflects the institutions of

Wall Street. It's little wonder that the same risks persist.

Integrity
The parallels between the old and the new are not limited to issuers, infrastructure and
institutions. The parallels also permeate the integrity of the players in the system.

Market manipulation, insider trading, shilling, spoofing, pumping-and-dumping and

conflicts of interest abound in cryptocurrency markets. This comes as no surprise to
anyone who has sat on a Wall Street trading desk, especially considering the relative
immaturity of crypto markets.

When I was a trader, I found myself acutely aware that Wall Street might be the hub of
it all, but somewhere - on the other end of all the Bloomberg screens, and broker-dealers,
and custodians, and clearing houses, and asset managers and mutual funds - were
individuals and their retirement money or their college savings.

The same is becoming true of cryptocurrency as retail consumers buy in.

Initiatives and standards are starting to emerge within the industry. Like so much else in
crypto markets, these initiatives largely reflect lessons learned by Wall Street.
Disclosures by journalists, pundits, and fund managers are starting to become
commonplace. Messari, an open source EDGAR-like database, is offering transparency
to investors on newly-issued tokens. The Brooklyn Project, launched by Consensys,
focuses on consumer protection and setting standards for tokens, encouraging self-
regulation by issuers.

Even Coinbase's probe into employee insider trading demonstrates that it is taking its
role in the market - and setting standards for it - seriously.

As Wall Street learned for itself, accountability is an important market practice. These
are important developments not just for consumer protection, but also for the growth
and longevity of the market as a whole.

Long-term greedy
If the hype in 2016 was all about replacing Wall Street's infrastructure with blockchain
technology, then 2017 was all about replicating Wall Street's infrastructure around
crypto.

This has led us astray of many of the original promises of cryptocurrency: promises
about the roles of issuers, of intermediaries, and of institutions. The level of integrity in
the market, unfortunately, also reflects that of the old system, exacerbated by general
market immaturity and a lack of agreed-upon standards.

"Long term greedy" is a notion that crypto would do well to borrow from Wall Street.
The idea is that certain behaviors, while they may benefit you less in the short term, will
pay off in the long run.

These behaviors include having a steady hand in volatile markets, something

cryptocurrency investors are well familiar with. More importantly, though, these
behaviors also entail respecting other market participants.

I think 2018 will see cryptocurrency markets continue to grow up and self-regulate.
2018 will teach us that being long term greedy is about more than holding - it's also
about maintaining integrity.

Finally, 2018 may return us to some of the original intent of cryptocurrency as the
market awakens to remember that the real value lies not through the looking glass, but
in the original promises of decentralization and disintermediation.

Sure, it will bounce back once in a while, but considering all the above it could easily
climb to $10,000 or more in the next few years.
The only things that can pop this ‗bubble‘ now are:

 Blockchain technology failing to deliver results.

 Governments gaining trust for their currencies by dealing with debts, deficits
and economic stagnation.
 Governments prohibiting the use or otherwise making it illegal.
 A high energy solar flare that will shut down all the electric systems.

It‘s when everybody wants a piece of the cake that you should cash in.

We haven‘t reached that point yet. Even when it looks that way sometimes, it‘s not that
mainstream. It‘s all new and incomprehensible for most people.

Bitcoin/cryptocurrency is no different than any other speculative investments that could

be mitigated through proper portfolio management. If you are uncertain about the future
or its value, then allocate a proportionate weight to your portfolio.

I tend to argue that since it neither meets the financial or economic definition of an
investment, it's best to use the word speculation. It's value comes only from the
expectation that someone else will buy it from you at a higher price, someone from
them, and so on.

It's value as a medium of exchange can't persist because it's not exclusive.

Maybe this will be the first completely speculative asset that will retain its value
through a regular persons retirement time period. But it would be the first of many more
that didn't.

It's value comes only from the expectation that someone else will buy it from you at a
higher price, someone from them, and so on.

I strongly disagree with this. This implies that there is no utility or use cases involved in
cryptocurrencies aside from the ponzi like nature of which you've described. I'm not
referring to any singular cryptocurrency, so this doesn't apply to all:

 Doesn't require counter party risk

 Known inflation control (no arbitrary printing)
 Can't be censored
 Borderless
 Anonymous (financial privacy)
 Unseizable
  Decentralized applications (again, relates to counter party risk)

The thing is, are people really using these coins as real currency? What percentage are
just being hoarded in the hopes they will get rich from a ponzi scheme? If you look just
at Bitcoin alone, the transaction fees are enormous and definitely currently don't make it
a frictionless, cheap payment system.

The thing is, are people really using these coins as real currency? What percentage are
just being hoarded in the hopes they will get rich from a ponzi scheme?

Not disagreeing with you, refer to original message:

I would argue too since most don't really understand what they're buying in the first
place or playing shitcoin roulette that for most it's in the realm of gambling.

Just pointing out it's incorrect to claim that it's only purpose is to sell it at a higher value.
Transaction fees are not relative to the amount/value being transferred in Bitcoin.
They're based on the number of inputs/outputs a transaction has resulting in it's total
byte size. For example, I think being able to send $100,000 to someone instantly for $2
is pretty good. I also think being able to send someone $5 for $2 is pretty bad.

Due to fees as you mentioned, using it as individual payments isn't that great but I can
give a better reason why it's not that great: it forces a taxable event because it's a
realized gain (or loss). Fees and scalability are however expected to improve in time as
the technology continues to grow, just price to me anyways seems to be outpacing
technological growth :)

Those are great features, and if there was genuine scarcity the monetary aspects might
be of measureable value (although i should point out that inflation is a symptom of a
growing economy. even with a fixed money supply it occurs because of multiple
deposit expansion and velocity factors. if a blockchain based currency was used in
banking and lending, we would still have inflation and would still need a central
banking institution to manage it or we'd have to accept dramatic boom bust cycles on a
scale greater than we did before the 40s.)

But scarcity is just an illusion. The blockchain technology is extensible without limit. If
you want to use a blockchain based currency to perform a transaction, you have over
300 to choose from that do more than a million in daily trading and 1300+ in total. And
this in the first decade of the technology.

*
[–]cadthrwaway9152 1 point 17 days ago*

I think you misunderstood when I said known inflation control. While for example
Bitcoin has an asymtotic limit of 21m, Monero the defacto standard of privacy in terms
of cryptocurrencies has a trailing emission (inflation). Regardless, my point is due to
inflation control you have an enforced schedule of how fast the minting occurs.

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[–]NByz 2 points 17 days ago

But not how quickly new cryptos are created or adopted by, say, institutions, banks or
even central banks. I feel like most of the monetary arguments presuppose that a single
standard coin will be agreed upon and that by voting up the price of bitcoin cash or xrp
or their compatriots, we're seeing the market settle on one standard or the other. I argue
that bitcoin could be bid up to $100k or down to $50 and it would be no better or worse
at being that monetary standard. Inflation is a measure of the monetary influence on
prices, and if we accept crypto as a currency, we accept them all. All 1300 of them.
They would all influence inflation. And new ones would continue to be released
whenever anyone feels they could make a buck from doing so.

That's why I argue that you can't assign a value to the monetary aspects of crypto,
however great it is absolutely. Not because it has no value, but because that value is
divided over a limitless quantity of currency that can be expanded almost costlessly.
Further, that's why I argue that crypto is purely speculation.

You seem to have expect him to have covered ALL concepts, but I think he did a good
job with some of the basics, and linked to well established concepts.

I feel that some people take these things as an "insult" to the investment, but it's not. If
you believe yourself to be involved in a high risk, speculative investment then you're
right! Bitcoin is that! And if you can admit that is what you intend to be doing then so
be it.

He goes off the rails in the latter half of the video, like how it "could be banned"
because of being used in terrorist groups. Banning it doesn't mean it stops existing. He
brings up the transaction volume issues - misses the point about some of the
developments there, that have their own problems too.

He gets back to inflation - good points again. Linking established concepts to plain facts.
Then somehow ends up talking about comparing to Bitcoin to Gold, but is mostly just
trying to discredit the person rather than the argument.

Not a great video. Some great points, and parts where he goes concise and sticks to
what he knows...and then goes off the rails.

Bitcoin processing uses more electricity right now then the entire country of Denmark.
It's expected to pass the US in a few years. Environmentally, that's not insignificant
given that as a civilization we're trying to reduce our global resources consumption.

It's an equilibrium. If it's profitable to add more hashing resources to the network, more
resources will continue to be added driving the network difficulty up. If it becomes
unprofitable, the hashing rate will decline and the network difficult will go down.

Bitcoin, alt-coins and blockchain are changing the world dramatically, just like back in
the dot-com days. There is a lot of hype, excitement and unregulated shady business &
scams. Many will not survive, those that do will be very influential in the future, and for
more than just money.

Well, shit. I‘ve been watching this situation for a few years, and assuming it would just
blow over so we wouldn‘t have to talk about it here in this place where we are supposed
to be busy improving our lives.

But a collective insanity has sprouted around the new field of ‗cryptocurrencies‘,
causing a totally irrational worldwide gold rush. It has reached the point that a big
percentage of stories in the financial news and questions in Mr. Money Mustache‘s
email inbox are about whether or not we should all ‗invest‘ in BitCoin.

We‘ll start with the answer: No, you should not invest in Bitcoin. The reason is that
it‘s not an investment. Just like gold, tulip bulbs, Beanie Babies, 1999 dotcoms without
any hope of a product plan, ―pre-construction pricing‖ Toronto condominiums you have
no intent to occupy or rent out, and rare baseball cards are not investments.

These are all things that people have bought in the past, and driven to completely
irrational prices, not because they did anything useful or produced any money and value
to society, but solely because they thought they would be able to sell them to someone
else for more in the future.
When you make this kind of purchase, which you should never do, you
are speculating, which is not a useful activity. You‘re playing a psychological, win-lose
battle against other humans with money as the only objective. Even if you win some
money through dumb luck, you have lost some time and life energy, which means you
have lost.

Noticed this ad on the corner of a website recently … because we ALL need daily
updates on an obscure piece of niche software technology!

Investing means buying an asset that actually creates products and services and
cashflow for an extended period of time. Like a piece of a profitable business or a
rentable piece of real estate. An investment is something that has intrinsic value – that is,
it would be worth owning from a financial perspective, even if you could never sell it.

Now, with that moral sermon out of the way, we might as well talk about why Bitcoin
has become such a big thing, so we can separate the usefulness of the underlying
technology called ―Blockchain‖, from the mania about how people have turned Bitcoin
it into a big dumb lottery.

This separation is important because the usefulness of Blockchain is the primary

justification people use for the big dumb Bitcoin lottery.

Once you make this separation in your mind, you can see that Blockchain is a simply a
nifty new software invention (which is open-source and free for anyone to use), whereas
Bitcoin is just one well-known way to use it.

Blockchain is just a computer protocol, which allows two people (or machines) to do
transactions even if they don‘t trust each other or the network between them. It can have
applications in the monetary system, contracts, and even as a component in higher level
protocols like sharing files. But it‘s not some spectacular Instant Trillionaire piece of
magic.

As a real world comparison, I quote this nifty piece from a reader named The
Unassuming Banker:
… imagine that someone had found a cure for cancer and posted the step-by-step
instructions on how to make it on-line, freely available for anyone to use.

Now imagine that the same person also created a product called Cancer-Pill using their
own instructions, trade marked it, and started selling it to the highest bidders.

I think we can all agree a cure for cancer is immensely valuable to society (blockchain
may or may not be, we still have to see), however, how much is a Cancer-Pill worth?

Our Banker friend goes on to explain that the first Cancer-Pill might initially see some
great sales. Prices would rise, especially if the supply of these pills was limited (just as
an artificial supply limit is built right into the Bitcoin algorithm.)

But since the formula is open and free, other companies would quickly come out with
their own cancer pills. Cancer-Away, CancerBgone, CancEthereum, and any other
number of competitors would spring up. Anybody can make a pill, and it costs only a
few cents per dose.

And yet imagine everybody started bidding up Cancer-Pills, to the point that they cost
$17,000 each and fluctuate widely in price, seemingly for no reason. Because of this,
newspapers start reporting on prices daily, triggering so many tales of instant riches that
you notice even your barber and your massage therapist are offering tips on how to
invest in this new ―asset class‖.

But instead of seeing how ridiculous this is, even more people start piling in and bidding
up every new variety of pills (cryptocurrency), over and over and on and on, until they
are some of the most ―valuable‖ things on the planet.

NO, right?

And yet this is exactly what‘s happening with Bitcoin. And if you haven‘t been digging
into the cryptocurrency world much, it gets way weirder than this. Take a look at this
shot from the website coinmarketcap.com, and observe the preposterous herd behavior
in real life:
Fig.1: Various cryptocurrencies, ranked by how many people have been fooled.

“Holy Shit!” is the only reasonable reaction. You‘ve got Bitcoin with a market value of
$234 Billion Dollars, then Ripple at $92 billion with Ethereum right behind at
$85,792,800,592.

These are preposterous numbers. The imaginary value of these valueless bits of
computer data represents enough money to change the course of the entire human
race, for example eliminating all poverty or replacing the entire world‘s 800 gigawatts
of coal power plants with solar generation. Why? WHY???

An Aside: Why should we listen to you, Mustache?

I‘m only a mediocre computer scientist. But coincidentally, after I got my computer
engineering degree I ended up specializing in security and encryption technologies for
most of my career. So I did learn a bit about locking and unlocking information,
hacking, and ensuring that independent brains (whether they are two adjacent CPUs on
a circuit board or two companies negotiating across the Pacific) can trust each other and
coordinate their actions in lockstep. I even read about these things for fun, with Simon
Singh‘s The Code Book and the Neil Stephenson novel Cryptonomicon being
particularly fun shortcuts to pick up some of the workings and the context of
cryptography.

But that‘s just the software side (Blockchain). Bitcoin (aka CancerPills) has become an
investment bubble, with the complementary forces of Human herd behavior, greed, fear
of missing out, and a lack of understanding of past financial bubbles amplifying it.

Mustachianism – the mental training that gets you to very early financial freedom –
requires you to evaluate inefficiencies in our culture and call bullshit upon them. Even if
you are the only one in the room willing to do it.
In the field of personal wealth, this means walking your children past the idling lineup
of your neighbors‘ Mercedes SUVs, over the snowy grass and up to the door of the
school – and being confident that you are doing the right thing. Even if you‘re the only
one doing it.

When evaluating investment bubbles, it means looking at where everyone is throwing

their money – no matter how many billions – and being willing to say “Bull. Shit. Guys.
Not going to do this with you.”

So I also read a lot about investment bubbles and fundamentals and how to tell those
apart. One book that I found very useful in understanding the greed-fear cycle (and
Central Banking and the Federal Reserve system to boot) is the 2001 classic Towards
Rational Exuberance by Mark Smith. For a shortcut to understanding good investing,
you can also simply look up Warren Buffet‘s thinking on almost any topic – he‘s careful
enough about offering opinions that by the time he makes a statement on something,
you can be pretty sure it will be among the best answers out there.

And of course, the purpose of this whole aside is that I want to establish credibility with
you, so you will give this article some consideration. I believe the current
Cryptocurrency ―investment‖ mania is a huge waste of human energy, and our rate of
waste has been growing exponentially.

The sooner we debunk the myth and come to our senses, the richer our world will be. So
we need more credible people to speak out against it. If you‘re one of these credible
people, please do so in the comments or in a blog post on Medium that we can all read.

Why was Bitcoin Even Invented?

Understanding the motivation is a big part of understanding Bitcoin. As the legend goes,
an anonymous developer published this whitepaper in 2008 under the fake name Satoshi
Nakamoto. It‘s well written and pretty obviously by a real software and math person.
But it also has some ideology built in – the assumption that giving national
governments the ability to monitor flows of money in the financial system and use
it as a form of law enforcement is wrong.

This financial libertarian streak is at the core of Bitcoin, and you‘ll hear echoes of that
sentiment in all the pro-crypto blogs and podcasts. The sensible-sounding ones will say,
“Sure the G20 nations all have stable financial systems, but Bitcoin is a lifesaver in
places like Venezuela where the government can vaporize your wealth when you sleep.”

The harder-core pundits say “Even the US Federal Reserve is a bunch „a‟ CROOKS,
stealing your money via INFLATION, and that nasty Fiat Currency they issue is nothing
but TOILET PAPER!!”

It‘s all the same stuff that people say about Gold, which is also a totally irrational waste
of human investment energy.
Government-issued currencies have value because they represent human trust and
cooperation. There is no wealth and no trade without these two things, so you might as
well go all-in and trust people. There are no financial instruments that will protect you
from a world where we no longer trust each other.

So, Bitcoin is a protocol invented to solve a money problem that simply does not exist
in the rich countries, which is where most of the money is. Sure, an anonymous way to
exchange money and escape the eyes of a corrupt government is a good thing for human
rights. But at least 98% of MMM readers do not live in countries where this is an issue.

So just relax, lean into it, and grow rich with me.

OK, But What if Bitcoin Becomes the World Currency?

The other argument for Bitcoin‘s ―value‖ is that there will only ever be 21 million of
them, and they will eventually replace all other world currencies, or at least become the
―new gold‖, so the fundamental value is either the entire world‘s GDP or at least the
total value of all gold, divided by 21 million.

People then go on to say, ―If there‟s even a ONE PERCENT CHANCE that this happens,
Bitcoins are severely undervalued and they should really be worth, like, at least a
quadrillion dollars each!!‖

This is not going to happen. After all, you could make the same argument about Mr.
Money Mustache‘s fingernail clippings: they may have no intrinsic value, but at least
they are in limited supply so let’s use them as the new world currency!

Why not somebody else‘s fingernail clippings? Why not one of the other 1500
cryptocurrencies? Shut up, just send me $100 via PayPal and I‘ll send you a bag of my
fingernail clippings.

Let‘s get this straight: in order for Bitcoin to be a real currency, it needs several things:

 easy and frictionless trading between people

 to be widely accepted as legal tender for all debts, public and private
 a stable value that does not fluctuate (otherwise it’s impossible to set prices)

Bitcoin has none of these things, and even safely storing it is difficult (see Mt. Gox,
Bitfinex, and the various wallets and exchanges that have been hacked)

The second point is also critical: Bitcoin is only valuable if it truly becomes a critical
world currency. In other words, if you truly need it to buy stuff, and thus you need to
buy coins from some other person in order to conduct important bits of world commerce
that you can‘t do any other way. Right now, the only people driving up the price
are other speculators. The bitcoin price isn‘t rising because people are buying the coins
to conduct real business. It‘s rising because people are buying it up, hoping someone
else will buy it at an even higher price later. It‘s only valuable when you cash it out to a
real currency again, like the US dollar, and use it to buy something useful like a nice
house or a business. When the supply of foolish speculators dries up, the value
evaporates – often very quickly.

Also, a currency should not be artificially sparse. It needs to expand with the supply of
goods and services in the world, otherwise we end up with deflation and hoarding. It
also helps to have wise, centralized humans (the Federal Reserve system and other
central banks) guiding the system. In a world of human trust, putting the wisest and
most respected people in a position of Adult Supervision is a useful tactic.

Finally, nothing becomes a good investment just because ―it‘s been going up in price
lately.‖

If you disagree with me on that point, the price of my fingernails has just increased
by 70,000% and they are now $70,000 per bag. Quick, get me that money on PayPal
before you miss out on any more of this incredible ―performance!‖

The world‘s governments are not going to let everyone start trading money
anonymously and evading taxes using Bitcoin. If cryptocurrency does take off, it will be
in a government-backed form, like a new ―Fedcoin‖ or ―G20coin.‖ Full anonymity and
government evasion will not be one of its features.

And you don‘t want it for this purpose anyway – after all, do you currently hide your
money in offshore tax havens and transact your business on black markets? Do you
practice illegal tax evasion as your primary wealth strategy? Probably not, because life
is better and wealthier when you aren‘t living a life of crime.

The Cryptocurrency bubble is really a replay of the past: A good percentage of Humans
are prone to mass delusions which lead to irrational behavior. This is a known bug in
our operating system, and we have designed some parts of our society to protect us
against it.

These days, stocks are regulated by the SEC, precisely because in the olden days, there
were many, many stocks issued that were much like Bitcoin. Marketed to
unsophisticated investors as a get-rich-quick scheme. The very definition of an
unsophisticated investor is ―Being more willing to buy something, the more its price
goes up.‖

Don‘t be one of these fools.

This MMM article seems almost contradictory to what has become an investment
philosophy that reciprocates with many people. These ideas are most problematic:

MMM Says: Trust world governments to control fiat currencies.

This is the most blasphemous thing ever to be written by MMM. As strong, intellengent
Mustachians, we must think critically for ourselves about what is implied by trusting
fiat currencies. For those of us who live in USA and use the USD for our currency, what
does it mean to trust that government, which is currently breaching 19 TRILLION
dollars in debt (https://en.wikipedia.org/wiki/National_debt_of_the_United_States)
while simultaneously reducing it‘s revenue stream (tax breaks for everyone). Most of
this money is being spent on military operations to secure foreign resources and kill
people will dissenting viewpoints in the name of national security. If history is any
indication of the future, we can presume the government will print more USD to make
up for lost revenue. This puts USD straight into the bank the Federal Goverment and
allows paying of debt. However, since more USD would automagically exist, USD
becomes less valuable (this is inflation – it‘s like stealing a little bit of USD from
anyone with cash positions). Only the most weak and fearful people will allow
themselves to be stolen from for the sake of mythical national security that comes from
trillions of dollars of military spending. As we know from MMM teachings, safety and
security are lies.

MMM says: There is no intrinsic value in cryptocurrencies

There is no intrinsic value in ALL FIAT CURRENCIES. However, some

cryptocurrencies DO have intrinsic value, which is computational power. Research
Ethereum further.

MMM says: Cryptocurrencies are useful for anonymity and evading the government
which is bad because we need the governemnt and we need to trust each other.

Again, this is really only true for FIAT CURRENCIES. The paper dollar is anonymous!
There is no reliable way to track or trace paper. It can be forged. It can be laundered.
However EVERY SINGLE BITCOIN TRANSACTION IS PERMANENTLY
RECORDED AND TRACEABLE. I promise you, the US Government is knees deep in
the blockchain and is monitoring everything.

My Take: Cryptocurrencies have A LOT of problems currently. No one can say for sure
whether or not the problems can be resolved and a highly transactable and stable
currency may emerge. This is where the speculating comes in. Personally, I disagree
that speculating is inherently bad. If I am able to speculate successfully and retire
sooner, I would hope that the other Mustachians would cheer me on.

Love this blog and agree with most of your opinions on Bitcoin.

One thing in that seems to be missing in this conversation that ‗Bitcoin maximalists‘
will always point out:
The security of the Bitcoin blockchain. Probably because it was the first and still the
largest blockchain based tech, a lot of capital has gone into Bitcoin mining equipment.
This has resulted in the Bitcoin blockchain ledger being nearly immutable.
Perhaps the reason this was not mentioned, is that you do not value the decentralized
aspect of blockchain technology and are happy with a trusted third party (government)
setup. Which is fine, but this trust-less nature of Bitcoin is what the early adopters
valued. (Now, as you mentioned, it is most likely just speculation driven by greed).

Personally, I am out of Bitcoin because it is no longer useful to me. There used to be

cool arbitrage opportunities on a website called purse.io, where you could buy amazon
products for a discount using bitcoin – but transaction fees have made those types of
business models (temporarily?) obsolete.

Thanks for your perspective on an interesting topic.

One thing that most people seem to miss about why gold was favoured as a form of
money (scarcity and shininess) is the fact that it literally lasts. Gold is relatively inert
(won‘t rust except for very tiny amounts of oxydation), it is relatively easy to verify its
authenticity (it‘s malleable, the good ol‘ biting the coin to see if it dents, you can melt it
to look for impurities as well as hard to fake the colour with lead based forgeries).

That is why our civilization used that rather than perishables or iron. While silver and
copper has been used as a form of money (notably imperial China, it was a silver based
society with gold used as a ―high‖ currency‖), gold‘s special attributes has always been
seen as a form of value storage and trusted trade medium.

As for USD working has many reasons, required to participate in the largest economy in
the world, the military power behind said economy, etc.

Totally agree about cryptos- but not sure gold should be lumped in with them.
Why?
1) If gold is a bubble, it is a > 5000 year one…
2) lots of other things are used as a ‗store of value‘ (paintings, etc)
3) If you are retired, with enough to last you the rest of your life even in cash, then you
have eliminated most risks (market crash etc) but not all- the currency you hold your
wealth in can fall greatly. Holding gold is not an investment in this case, it is a hedge.
Yes, you can hedge in other things, but gold is fungible, dividable, small enough to hide,
and has been valuable for centuries. I am not trying to promote it for this purpose, but it
is not an invalid choice. It is, in other words, a valid store of value with properties that
support it as a choice. Not everyone agrees, but it cannot, unlike cryptos, be regarded as
‗stupid‘.

I have no issue with the block chain. If it was instead patentable I‘d buy some stock in
the holder. I suspect it will have uses beyond public currency.
My issue is with the currencies themselves. Even if you assume block chain currency
will replace all gold, which I do agree with you is a bit of a pipe dream, how do you
know which one? All technology goes through a bit of a curve where new technologies
have multiple competitors and slowly they formulate around standards and a smaller
core group of players. What if anything gives a compelling reason that bitcoin or any
one of these other currencies will end up in the group? If your chosen currency doesn‘t
win out it goes to 0 since if it has no users it has no value. Your in effect speculating on
a winner even if you do believe the technology is the future.

I‘m always reminded of VHS versus beta max but on a few thousand options scale
(rather then two) and a higher risk if you choose wrong (at current prices). No one
foresaw that VHS would win, and yet Betamax was gone not many years later. Imagine
he same concept but at least an old beta max has some residual value if you still own
tapes…

Long time reader, first time commenter (ha).

While I agree with your sentiment about Bitcoin — I have been echoing similar
warnings to friends and family since it‘s mid-2017 breakout to $2k — I think several
other cryptos are definitely deserving of a portion, albeit small, of an investment
portfolio.

Back in it‘s heyday, BTC was incredibly valuable for making monetary transactions
(essentially anytime before this recent mania clogged up the blocks). Some newer,
better tech has now taken BTC‘s place here (LTC or any DAG technology). Anyone
who‘s ever had to wire money between banks will appreciate the quick transaction
times and low (or zero) fees of these coins.

―Altcoins‖ also stand to disrupt several huge, sleepy industries and solve real world
problems. E.g. remittances, credit lending for undocumented people. Problems that
don‘t bother your average North American, but could be very valuable to many people
the world over.

Some ‗Alts‘ are even working with the existing banking infrastructure to get them up to
speed and are acknowledging the unfeasibility of anonymity (Ripple, Cardano).

Right now, I think that this space allows people to be their own VC. If you feel
comfortable developing your own metrics with which to gauge coins and want to invest
in projects long term, you can.

I‘m in the same boat. I keep thinking of that movie where the actor says ―Explain it to
me like I‘m a 2 year old.‖
So, Bitcoin is supposed to replace all forms of physical currency – in theory – because
people don‘t trust banks. But, don‘t you initially invest money into Bitcoin thru your
bank? Is the theory that eventually there won‘t be anymore banks? (like ATM‘s were
supposed to replace Tellers years ago *eye roll*) And Bitcoin is replacing the banking
system? Because the banking system is corrupt and big government can‘t watch over it?
Yet, the banking system has been around for hundreds of years and I don‘t see it
disappearing into the sunset anytime soon. We still need banks for other forms of
financial services such as loans, investments, business services, etc.. Will Bitcoin
replace that, too?

And what about physical forms of cash for private sales? Is Bitcoin eventually going to
replace the physical green back dollars and coins in our pockets? Because they‘ve
talked about doing away with the penny for YEARS now and yet, I still have pennies in
my pocket. And even if that was true, there are still many forms of private sales going
on everyday where people don‘t want a traceable form of payment / exchange. There‘s
illegal activity in all its shapes and forms (ie. drugs, prostitution, gambling, etc.) as well
as all legal forms of private sales (ie. babysitting, lawn mowing, snow shoveling, etc..)
So, how is Bitcoin replacing that? Because when the Northeaster blows through my
town and knocks down a power line, I want to pay the 15 year old kid who knocked on
my door and shoveled my driveway $30 bucks. When the internet / electric / grid is
down, I can‘t pay him via my iphone and at the moment, the kid wants cash. Or when I
have to go to the grocery store to buy milk and there‘s the sign that says ―NO POWER,
CASH ONLY‖ and my toddler is crying for milk, I‘m going to pay them in cash. Again,
how is Bitcoin replacing that?

In my personal opinion, Bitcoin just seems like another form of a financial institution
that is trying to say it‘s not an institution when it walks like a duck, quacks like a duck
so… it must be a bank, no?!

And wasn‘t Apple Pay and all these other card-less app‘s of paying for goods and
services supposed to replace carrying around a physical wallet and/or cash? Because I
still can‘t pay for groceries in my town without swiping a card or handing over some
US dollars. So, how is Bitcoin better or different?

I‘m in the same boat where I don‘t understand it and it doesn‘t make sense to me in the
real world. It‘s like trying to say Bank A is better then Z Bank because it has a fancy
new way of getting money. I want to know will it make my day to day life easier? Will
it get me my money faster? Will it help me achieve my financial dreams quicker? No?
Then I‘ll stick with what works for me now…. in my opinion.

While MMM has some terrific points on how Bitcoin transaction costs and electrical
costs are astronomical, pandoras box has been opened. Places like Singapore, Estonia,
Switzerland appear to already working on converting their systems to digital cash. Why
you ask? Well so they can monitor everything and where all the funds go. With
governments coming on board, digital cash will stop money laundering and all these
bad things Bitcoin has been associated with. Look at Cardano for example, they are
building blockchain with built in treasury and KYC/AML endpoints. I wonder why. If
you are disgusted with the mining costs of Bitcoin you should be but the fact remains
new inventions like RaiBlocks has made cryptocurrency frictionless and without mining
or fees with transactions at over 7,000 per second. More than triple the speed of
Visa/MC. It‘s not about bitcoin anymore and unfortunately people still don‘t realize that.
The cost savings from implementing everything on immutable ledgers has significant
cost savings and automation of processes which is why there is so much speculation.
Unfortunately for most people that think they are missing out on everything, they are
being lead to Coinbase and only buying the cheapest tokens available, namely Litecoin
because Ethereum and Bitcoin have gotten so expensive. As for spending your Bitcoin,
I digress. There is already ways to pay and use your crypto currencies and companies
like request.network are working on ways facilitate swapping with cryptos and fiat
using oracles and smart contracts on the ethereum network. While cryptos are new, they
also don‘t meet the needs of traditional cash flow analysis but for a new asset class but
just because it‘s new doesn‘t mean it‘s a bad idea. In 2018 and 2019, expect the
speculation to subside as more tokenomics becomes important for valuations. Lastly,
once KYC and AML is figured out, I have a hard time understanding why people would
even want to use paper fiat instead of a digital fiat.

Incredible comment. Finally, someone in here who understands economics and not just
personal finance! Value is subjective; not all speculation is irresponsible; gold and other
odd stores of value have novelty effects.

The only thing I would add as a further disagreement to MMM‘s article is that
speculation is inherently a GOOD thing. The act of speculating on an asset is what
drives it to its proper price; they are critical players in the process of price discovery. I
dislike all this vitriol given to speculators when they are fully valuable members of an
economic system.

Mr. Mustache. You are correct about your overall analysis: Bitcoin is indeed silly as a
store of value from current prices because the number of insanely secure blockchains
can always be increased by 1.

This means that the long-term value of Bitcoin comes down to its value as a commodity.
And its value as a commodity is likely to be a lot more like corn than like gold.

However, there are a couple things you are wrong about here, and are worth
commenting on. For one, your irrational hatred of gold, whose function for human
beings you do not seem to understand.

Mostly: It‘s shiny and pretty and makes great jewelry and chicks dig it. Yes, this is a
function.
It also has technological demand. (You couldn‘t type to me on a computer or launch a
satellite into space without it.)

But if all gold ever did was look pretty as jewelry and increase human race‘s chances of
successfully reproducing due to its function as a romantic signaling device that
encourages saving, commitment and mindfulness, that would be enough to give it some
real lasting value—and probably at a fairly high unit price based on how hard it is to
make more of it.

(Again, you also can‘t go to space without it, or use your computer, but we can set that
aside for the moment.)

You write that things that ―gold, tulip bulbs, Beanie Babies, 1999 dotcoms without any
hope of a product plan, ―pre-construction pricing‖ Toronto condominiums you have no
intent to occupy or rent out, and rare baseball cards are not investments.‖

I agree that none of these are ―investments‖, because they do not produce cash flow, but
that does not mean they are all insane purchases at every price. Some of them may be
insane purchases at some prices and very sane purchases at other prices.

Yes, it is insane to value something highly solely because other people might value it.
But some people actually DO value rare baseball cards and stuffed animals and gold and
tulips at current prices, as ―goods‖ in and of themselves. Whatever they are willing to
pay to enjoy owning these things themselves is their business, and may make for a fairly
―rational‖ purchase. It all depends on how much personal enjoyment they get compared
to the cost to own them.

People like planting gardens. So buying tulip bulbs is not insane at a reasonable price.
Some people like owning pretty jewelry. (Or computers or spaceships.) So owning gold
is not insane at a reasonable price. On the other hand, paying a ridiculously high
speculative price based only on what others *might* be willing to pay in the future—
based on little historical or reasonable evidence—certainly is insane.

You write that ―These are all things that people have bought in the past, and driven to
completely irrational prices,‖

But this is not necessarily correct in every case. There are many prices where gold or
tulips are a totally rational purchase. Maybe not $500,000 an ounce or a bulb, but at
some other far lower price, they can be an entirely reasonable purchase.

For instance, I believe I bought tulip bulbs for my wife at a price around $1 a bulb, and
we were quite happy with them. Not a penny was wasted. They grew pretty flowers that
we enjoy looking at. Some more attractive or reliable bulbs might even reasonably cost
more.

We also both wear wedding rings made of gold and are quite happier with them than if
they were made of copper or tin or lead or nickel or mercury. She‘s allergic to nickel
and tin and lead. I believe I may be allergic to mercury. (It‘s also very hard to make
jewelry out of.)

―…but not because they did anything useful or produced any money and value to
society,‖

This one is just simply incorrect. If a ―good‖ provides value to just one person without
hurting anyone else, then it provides value to ―society‖. This is because society is
nothing but an abstract grouping of individuals. The happiness of society is made of the
happiness of individuals and nothing else. There is no one to be happy but individuals.
And ―society‖ is comprised of them, and nothing else.

Anyway, if your argument were correct—which it partially is—then you of all people
should be against fiat money systems like the US dollar in its current form.

After all, the ONLY thing that gives a fiat money its value is what someone else is
willing to give you for it. (Aside from the threats of force that stem from legal tender
laws.)

In this way, dollars are the ultimate speculation. Unlike gold or tulip bulbs or cigarettes
or salt, no one desires dollars as ―goods‖ in and of themselves. They only speculate that
others may want them in the future.

Gold may be irrational, if you insist that it is. But if that is the case, then it is far less
irrational than are dollar bills, especially over long periods of time.

It‘s like Winston Churchill said: Gold is the silliest, most irrational thing you could ever
use as money. Except of course, for all the others.

If you ever want to see what a real bubble looks like, please look at a long term chart of
stocks—or dollars for that matter—priced in gold. If you have the courage. I dare you to
look it up! :) If you‘d like a link, just holler!

But yes: Bitcoin is silly at current prices. Doubly so because it is now so broken by its
development team that it is perhaps the only cryptocurrency that I know of that doesn‘t
even work as currency. Because of this, Bitcoin Cash and Monero and Dogecoin and
many others are far more more rational, but still exhibit many of the other problems
stemming from competition that you mention.

Gold and tulips and coffee and salt and any other ―good‖ at a fair price, however, are an
entirely different story. There are many reasonable prices for these goods that are non-
speculative in nature.

Good comments Jon.

My disagreements w the article summarized:
gov issued currencies = Human trust and cooperation. … how is this different than a
crypto?

Full anonymity and government evasion will not be one of its features. ..why hasn‘t
shutting down bootlegged videos on P2P bittorrent etc been effective? Even a war on
drugs, which has a physical element, isn‘t being won by central gov.

In a world of human trust, putting the wisest and most respected people in a position of
Adult Supervision is a useful tactic…. I agree w jon. They seem less ―wise‖ and more
―credentialed‖. Also, I wonder the extent of whispering in their ears & kick backs they
could/likely do get. We‘re human, so human.

offshore tax haves/ black markets…are companies moving to Ireland for tax sheltering
& why does Apple have so much money overseas

Regulation by SEC…I doubt there‘s any way to know the innovation that has been
stifled, the small companies which never existed, the middle class growing local
investment missed, because there‘s no cheap seat at the table. Do we really want a place
where you‘re either an Amazonian or Walmartian? if they don‘t open one day, the
fragile world crumbles.

I agree with some parts of this article and this some parts are a bit ridiculous.

I use purse.io to buy stuff from Amazon. Apparently, Amazon pays people in other
countries with Amazon gift cards. They can‘t use these gift cards. So, I use bitcoin to
buy stuff with the gift cards from these people. It‘s a win-win situation. They get to sell
me their give cards at a discount and I get to buy stuff from Amazon for cheaper.

I don‘t buy that much stuff. But I did put about $600 in Bitcoin over a year ago. It has
now grown quite a bit, of course. I let it sit around 2.5% of my savings (I‘m still
growing my nest egg). But if it goes down, I won‘t put anymore money into it. So, I
harvest other people‘s speculation and I don‘t lose anything, as I have already harvested
more than what I put in. I‘ve made more per hour than I do at my day job compared to
the effort that I have put into this.

I agree that Bitcoin isn‘t an investment. But if you have some play money, it doesn‘t
hurt to speculate if that is what you enjoy doing and don‘t mind losing everything you
put in.

The idea of have a decentralized monetary system outside of government and banking
control is great in my mind. Bitcoin isn‘t that though. But maybe an iteration of that will
be. I have shown from above that their is value in digital currencies. What value is
there?
– I can leave the country with it if the government ever gets out of hand (I can‘t do that
with gold or cash since it will likely be confiscated or banks be frozen). Read your
history, it happens occasionally.
– I can have a stash of cash that is inflation proof just in case the government decides to
wildly inflate the currency. Read your history, it happens occasionally – even in the
great USA (a few times actually). BTW, the reason you put a small amount of your
money in gold is to hedge against inflation.
– I can trade with anyone in the world for a low price (not necessarily with bitcoin as
the price has gotten expensive but with other currencies).

There are other points that I can‘t think of right now.

Do I trust the people at the federal reserve that helped cause the 2008 crash and didn‘t
call it beforehand? No. If you read your history on this subject you would understand
why I don‘t. They‘re not very good experts. Having interest rates all the way down to
near 0% without a good exit plan should give you some pause how much you want to
trust these people. Just because the recent past has been good times doesn‘t mean it will
stay that way. As the people in Greece and Iceland found out, along with people in
many other countries. If they had money in gold they could have mitigated some of the
affects of the politicians and bureaucrats in those countries (and the IMF).

Trust is important. That is why I also invest in government bonds. Because I think they
don‘t want to devalue the money too fast. But sometimes they do. And you should be
prepared for it. I‘m not saying to build a bunker or anything but just diversify your
portfolio for different economic times. Just because the last while has been great, it
won‘t always be that way. But I hope the good times continue for a long while!

Hell isn‘t that why we are here in the first place? Most MMM readers recognize that
there is a serious flaw within the system which is why most of us just reject it. We don‘t
buy ―average cars‖ or ―average homes‖ we buy older cars, and smaller homes to cut
costs and live a modest life.

I‘m not trying to convince anyone that bitcoin is the savior of the world but to put total
trust in ones government, one that has a history of corruption is ignorant. Bitcoin and
other Cryptos are attractive for that reason and that why people spread this
misinformation about it to sway people from backing it.

MMM i normally love your articles but you knew this one would be polarizing I‘m sure.

For one you keep bringing up this ―no intrinsic value‖ point, which is common, but fail
to recognize that the USD also has no intrinsic value. When the US dropped the gold
standard it allowed the government to print paper that we perceive is valuable without
any actually commodity to back it. In a sense one could swap bitcoin to USD and the
article still stands.

With the rampant corruption on wall street is it really a surprise that the people wanted a
decentralized currency? Satoshi, while extreme in his views, watched the housing
market collapse due to the fraudulent behavior of the banks and the government that
backs them. This is why bitcoin was created in the first place. Big banks get crushed,
millions of americans were underwater on their homes and forces to foreclose and then
they get a bailout from the US of A paid for by your‘s truly, the average american tax
payer.

The government has done some sickening things to ensure the wealthy and powerful
stay wealthy and powerful. i‘m not some conspiracy theorist but I do see the value in a
global decentralized currency (none of which is tax evasion btw, Every major exchange
currently advises and provides you with a modified 1099-INT for you to file taxes, the
IRS as well recognizes bitcoin as owning ―property‖ and implicated short/long term
taxes for owners)

Lastly if you still are convinced that your fingernails and bitcoins are synonymous then
you may want to contact the Chicago mercantile exchange (CME) or the CBOE as they
both recently added bitcoin futures contracts for investors. I‘d love to see MMM
fingernail futures one day on my ticker chart.

Bitcoin has its flaws and needs to improve as you mentioned:

Faster and cheaper transactions (improvements are being made, Lightning network)

Stable value (futures actually help volatility. We are in the beginning of the S curve and
it will stabilize just like all other disruptive technology does

Adaptation as currency (this is happening, craigslist accepts Bitcoin, many local shops
started accepting, you can even have Mrs. MM get paid by bitcoin on etsy. It is
happening, slowly but none the less all three of your ―issues‖ should be gone within 5
years)

Long story short bitcoin provides value. Is it speculation, sure, but it‘s no different that
speculating on the future price of a stock, or oil, or the rental market. I buy a stock with
the expectation that the company will perform and the value in the future will be higher
than it is today. I buy bitcoin with the expectation that bitcoin will solve the problems it
currently faces and become more widely accepted thus increasing demand driving up
the price.

The root of crypto is decentralization and independence from government that

empowers people. No doubt we are in a crypto mania now, but the concept of a global
digital currency has been coming since Biblical times. Crypto is here to stay albeit
probably not at insane prices.
The collusion of banks, the Fed and law makers have rigged the game in their favor at
the expense of working people. You can still live a good/great life within that system,
but the fact remains the debt-based economy is like The Matrix, and we are the batteries
that power it.

MMMers have unplugged from debt, but putting all faith in the designers of The Matrix
seems ironic.

Red Pill!

I think that the point being missed in all of this is NOT that people want to evade taxes,
but that they are being screwed backwards & forwards by the banks (& the tax evaders-
in-chief that run them). C‘mon, only wealthy people evade taxes in amounts that would
matter & there‘s a cottage industry made of tax lawyers doing just that for them. Poor
people have never initiated a tax ―loophole‖.

So, all of the normal, previous ways of saving have been destroyed & the banks/corrupt
bankers get bailed out, over & over & the regular people are sick of it. Even as these
banks show SKY-HIGH PROFITS, they mostly evade their share of tax via loopholes.
Meanwhile, the honest, hard-working regular folks see their interest both plummet to
nearly nothing, and they then see THAT minuscule interest TAXED AGAIN! Well,
SOMEONE has to keep the bankers & wealthy rich, right???

That, is where we‘re at. When you see nothing but nothing in your banking/investment
future you start to look outside of the dark box you‘ve been dumped in. If the standard
institutions weren‘t a (gov‘t-supported) bunch of crooks & were not in place to help
only their cronies, this whole bitcoin situation would likely never have happened.

***
SICK:

If you know anyone heavily vested in bitcoin, stay in touch with them. Soon, they will
be on the brink of bankruptcy and you will be able to purchase all of their stuff at a
discount. I regularly visit ―flip this home‖ seminars just to network with people who
leverage all their credit to gamble on an endeavor they have no experience with.

As a result, I have cashed out on their misfortune. It‘s not that I enjoy seeing people
suffer, but who am to talk them out of it? After all, some total stranger selling Snake Oil
on YouTube has a vested interest in the well-being of John Doe and his family‘s
financial stability. Therefor, John will go on believing strangers on YouTube over me so
I will be there to pick up the pieces when the house of cards crumbles.

Reply

Or stay in touch with them because they might become millionaires?

 Either way how about not alienate people based off their investments and act
like an actual human being instead of a sociopath?

I understand this is an MMM forum but i mean come on.. you have to recognize
that managed risk is a part of building wealth. Buying real estate, gold, stocks,
even ETF‘s and Bitcoins, all of these have risk. if you over leverage yourself in
any of these you can find yourself in trouble.

Yeah, I‘ve discussed the mining with my friend from NVidia. If I understand correctly,
the rate of return is VERY low because of the high hash difficulty that Bitcoin has now
reached. For newer cryptocurrencies, there may be a higher dollars-per-kilowatt-hour
return, but I don‘t know these numbers myself. Do you have any stats to share?

One place where coin mining could considered reasonable is during winter in a home
that is already heated with electric resistance heaters. Since every appliance (computer,
lightbulb or actual heater) is a 100% efficient electrical heater in a thermodynamic sense,
you could shut off your heaters and run mining computers instead, to get the same
amount of heat.

But, these days you shouldn‘t use resistance heaters except for the lightest heating loads,
because they are obsolete. Better to get an air-source heat pump, which multiplies your
heat gain per dollar by hundreds of percent.

The growing demand for more electricity is the most serious issue with Bitcoin, IMO.
Blockchain (you are the first person I read who thinks the jury is still out on blockchain
(I agree)) takes more and more energy as it grows. Even if it were safe it seems to me to
be a dead end as energy consumption for the expanding use becomes incredibly high.
I‘m not an IT guy of engineer so I could be wrong, but the energy issue and the safety
issues you mention makes Bitcoin tera incognito for all intelligent human beings.

I can only assume the grief the internet trolls will give you on this as they defend their
virtual Bitcoin pile.

So basically you don‘t understand any of this, therefore it must be a scam. What a bad
article. Herd behavior? Or maybe you don‘t understand how exchanges work. Have you
ever taken a look at how correlated the stocks of an index were?

I don‘t feel like making a well-constructed arguments because I‘m tired and this may
make me look like a fool but frankly, I don‘t care. Cryptocurrencies are extremely risky.
Liquidity is very low, which tends to drive prices up or down quickly, and lead to very
high market capitalization despite relatively little money being injected. If it‘s a bubble,
it will be the first bubble where a large portion of investors know it could all be a
bubble and where most investors are tired of hearing about tulips.

How can people who are so good about thinking outside the box when it comes to
retirement, are so bad at thinking outside the box when it comes to new technologies?

Blockchain isn‘t just a software protocol, the algorithm guiding it doesn‘t have to be
open source, some cryptoassets pay the ―miners‖ for securing the network through
concepts such as proof of stake and delegated byzantine fault tolerance, some networks
support decentralized applications with actual potential and have intrinsic value.

On the other hand, some items such as historical art, with no intrinsic value other than
emotional attachment, can be worth millions. Why? Consensus over its value. Bitcoin is
extremely risky, but it is not dumb and its value is also based on consensus. I‘m sorry
MMM, but the consensus is that your fingernails are worth nothing (you couldn‘t even
pay me to hold them), and that 1 BTC is worth more than your bike. Bitcoins are scarce,
your fingernails are not. Bitcoins can be traced, your fingernails can‘t. Bitcoins aren‘t
duplicable, your fingernails could be replaced by other fingernails and nobody would
notice unless they do a mass spectrometry. Bitcoins will never degrade over time, your
fingernails degrade. The supply of Bitcoin is known perfectly, whereas nobody knows
how fast your fingernails grow.

Why Bitcoin and not another coin? I don‘t know, why gold and not platinum or
palladium? Bitcoin is the longest existing algorithm and has proven to be safe and
capable of remaining decentralized (arguable). It is the main currency by which you can
obtain other cryptocurrencies. However, Bitcoin is one of the least performing major
cryptocurrencies, so let‘s not talk about fucking Bitcoin all the time just because the
price of one unit is in the thousands. There is a high chance that Bitcoin doesn‘t remain
#1 forever because there are so many cryptocurrencies, many of which with very
different applications, including some that aren‘t even based on blockchain technology.

For the first time in history, a machine can own ―money‖ and make its own purchases.
That‘s something worth giggling. Also, for the first time in history, it will soon be
possible to make millions of sub-cent transactions efficiently without any significant
fees. That‘s cool. Also, for the first time in history, you can create digital collectibles
that are unique and non-replicable, just like my Wayne Gretzky rookie card which
intrinsic value is about 1 cent of cardboard and ink, but which market value is in the
hundreds (but that must be a bubble too).

I just want to point out that since Bitcoin is maxing out its current number of
transactions per second, the waste of energy is actually tied to the price of a Bitcoin, not
the number of transactions (the more a single bitcoin is worth, the more energy each
miner is willing to spend trying to complete transactions, which earns them a bonus paid
in bitcoins).
The good news is that more transactions alone wouldn‘t raise the energy cost (although
more transactions are currently impossible anyway), and if Bitcoin raised the price of
electricity in one country it would probably just cause people to mine somewhere else.

The bad news is that this means Bitcoin is going to keep wasting more and more
electricity as the bubble goes on, and it doesn‘t matter that no one uses it anymore.

You could always follow the Long Island Iced Tea model:

1. Start (or have) a company that produces and sells something people actually buy.
2. Get listed and sell some shares. Keep plenty for yourself.
3. Change the company name to include the word ―blockchain,‖ and explain that you‘re
pivoting from [USEFUL_WIDGET] to ―exploration of and investment in opportunities
that leverage the benefits of blockchain technology.‖
4. Profit!

The reason Bitcoin has been driven so high is because it‘s a limited supply. If you
accept for the purpose of argument that Bitcoin has value to the world, then it‘s
essentually a land rush to get as much of it as you can while it‘s cheap.

It‘s funny reading your article because while I‘m a true believer in bitcoin as the
internet of money, I feel pretty much the same way as you do about 99% of the rest of
crypto. There valuation of pretty much everything but Bitcoin and Ethereum is
unjustifiable.

Either way I don‘t think you‘ve fully connected the dots as to why it has value. The
value of a blockchain is its immutability, derived from its decentralization. No one
controls it, so no one can rewrite the data. So right there you can scratch off any use of
blockchain as pointless if it doesn‘t benefit from immutability. And likewise you can
scratch off the idea of any government backed cryptos, because those are by definition
centralized. Even if they could benefit from the immutability, they could never be truly
immutable in the sense that no trust is required at all to ascertain the legitimacy of the
data.

So in order to have immutability, we need decentralization. In order to have

decentralization, there needs to be an incentive for people to commit resources to
running the network. Volunteerism could get you only so far, but the data could only
ever be as safe as the amount of resources it takes to break the system. So a volunteer
based system wouldn‘t be secure enough to be considered immutable for data of high
value. So just like you say there‘s nothing stopping you from creating your own Bitcoin,
it‘s the same code….unless you could attract hundreds of millions of dollars of
computing power to ensure data integrity on your blockchain, it‘s as worthless as your
nail clippings.
So there‘s a positive feedback loop here. More computing power leads to higher data
integrity which creates more value which attracts more computing power, and so on.
The cryptocurrency is the glue that holds the system together.

Note that if you remove any of these essential elements, you‘ve made the system
effectively worthless. Take the decentralization, the trustlessness, the miners or the
currency out and you throw the immutability out. And if immutability isn‘t necessary
for your use case, just use a database and save yourself the headache.

So now that you‘ve got an truly immutable public data store, what do you do with it?
Currency is by far the most obvious application. So no surprise that‘s the first one,
especially considering you need it to make the system work at all. But that‘s just the
start. Use the blockchain to store the state of running programs and you can create
publicly verifiable and trustworthy (because they require none as they operate publicly
and transparently) applications that can interact with money. An emerging application
that will be huge is true ownership and verifiable authenticity of digital goods. Or
physical goods if you want to use it to record land or vehicle deeds, etc. Publicly
verifiable voting as well, when the chains are worth trillions.

But I get that most of these things aren‘t problems that need solving in the first world.
The problems it solves for the billions of people in the second and third world shouldn‘t
be so casually dismissed though. But anyway….you need a little imagination to see the
value it has for the first world, because it has to arise from something other than a
replacement for something preexisting. So by definition we need to start talking about
things that don‘t exist yet because they *can‘t* exist without immutable blockchains.

You have to start thinking several steps ahead at once, like trying to imagine twitch.com
in 1990. Millions of people streaming interactive video games. Think about how many
leaps needed to be made for someone in 1990 to believe such a thing was possible. The
internet. The web. Inexpensive computers thousands of times more powerful than the
best you could buy for $10K in 1990. Broadband. Video compression tech. Networking.
A billion dollar gaming industry creating games worth watching. A digital advertising
ecosystem to fund it all. It would have sounded like science fiction, and even if he
accepted it was possible – he still wouldn‘t understand why anyone would want such a
thing.

So what I‘m saying is…don‘t dismiss it based on where you see today‘s generation
using today‘s rudimentary blockchain with today‘s technology and society. Think about
how tomorrow‘s generation will use far a more advanced blockchain tech to interact
with far more advanced internet and general tech to create things that we can‘t even
conceive of yet, let alone why they would have value. And then follow that thread all
the way back to the fact that the future blockchain(s) all of these future uses are built on
are going to be continuations of the most valuable blockchains of today – because
valuable blockchains are a prerequisite for the data integrity required for high value use
cases. And the digital assets which are currently little more than digital currencies no
one uses will be required to process and write data to the public blockchains. It‘ll be like
monetizing bandwidth – because we‘re effectively dealing with the internet of value and
ownership. Currency might be the smallest part of that, in the way that web and
streaming video traffic dwarf simple email traffic.

So when I invest in bitcoin, I‘m not betting that it‘ll replace dollars anytime soon. I‘m
betting that the collective ingenuity and creativity of humanity will take this tech and
run with it to places we can hardly imagine – and they‘ll only ever get there if early
investors like myself support and secure it while it‘s in its infancy. And like investing in
anything, it‘s not a matter of altruism – if I‘m right about the continuity of value in
blockchains as measured by the value of its underlying currency, I‘ll see a healthy
return on my investment.

Reply

Vijay January 6, 2018, 4:52 pm

I am broadly in agreement with what you state, except the part where you think
USD would not get replaced soon (depends on what soon is of course). I am of
the opinion all of Fiat will get wiped out in a decade or two! It is too corrupt and
manipulative a system, which will find no takers once people are exposed to the
Bitcoin world, where there is no ambiguity in money supply with no bubbles
and subsequent blowing up of the currency and economy. All that the US has
done since 2008, is hit the ball further and further down the road while at the
same time blowing it more and more with air (read Quantitative Easing). Now
the ball has reached proportions where it could blow up anytime, and people in
this forum are talking about the small change like the bubble and P/E ratio in the
stock market. Talk of being blissfully ignorant! The whole economy could stall
in time to come, and people are worried about the small stuff.

MMM, you cannot call Bitcoin Stupid and then go tangentially into an Utopian discourse. We
cannot have better living conditions for half of humanity on this planet under a corrupt and
manipulative central banking system of various countries, that are not even true democracies.
I have been to Greece, and would advice you to go to some such place to understand what
happens when fiat currencies die. All this bullshit about “backed by faith and credit of my
country” goes out of the window when currencies die someday. People suffer immensely. A
decentralised system where no human has the power to manipulate money supply is the best
thing that any society can expect, to get its finances and economy in order. Just imagine if an
universal decentralised currency becomes the world’s reserve currency! The poorest in Sub-
Saharan Africa earns the same money that you sitting in Manhattan, NY do. That is when we
are talking equality and progress for all! Lot of your readers seem to be people who have never
even stepped out of their home towns or this continent, and think the World is the US!
*

Alright, time for a thought experiment. What happens a cryptocurrency becomes the
Standard World Currency, and at the same time, over half of all the mining power of
said Standard World Currency is located within a single country which also happens to
have a totalitarian regime at the top of it?

Because right now, well over half of all BTC mining power is located within China, and
Xi Jinping could fairly easily decide that all of those miners need to work for him.

What happens in that scenario?

Reply

Vijay January 8, 2018, 5:59 am

NOTHING HAPPENS! There you go. Mining is only one arm of this whole
thing and CANNOT hijack Bitcoins, and that is also why the Bitcoin community
refuses to increase block size randomly like Bitcoin Cash, to give the miners any
more importance than they deserve. Even if Mining gets centralised, Bitcoins
future cannot be dictated to by them!

Spot on VIJAY. This will go down in history as the DUMBEST thing Mr. Money
Mustache has ever written.it honestly pisses me off how dishonest he is and his he can‘t
see the big picture out of his Statist status quo lenses.

Calling this a waste of human energy is NUTS. This is the greatest use of human energy
and capital the world has ever seen. Saving billions from poverty, war, and the
enslavement of banks or the lack of any banking is Altruistic. Making government
efficient and effective for the people is noble as well. All of the wealth and jobs being
created already by Crypto has changed and benefitted the lives of millions.

Blog readers. Ignore this utterly irrational FUD and embrace the digital world.

Do you know the state of US debt recently? It is 110% of your total and entire GDP, and that is
just your Federal Debt. If I add your state debt and unfunded liabilities, US is BANKRUPT! Yes,
that is your ground reality today. What are the world currencies pegged to ? – Air and the US
Dollar. What is the US Dollar pegged to? Pure Air and a bunch of IOUs that it will eventually
default on. Fiat currencies my friend is working overtime for its own demise. Bitcoin is actually
a saviour that provides the world an opportunity to get out of total mess without fighting a
WW3!

Educate yourself on why Bitcoin and Blockchain cannot be split up. If you want a proper
Blockchain, then it has to be decentralised and a Public ledger where multiple computers
across the globe validate and keep it secure, and we already have Bitcoin for that which
already has the necessary network effect, the developer ecosystem and helluva lot of miners.
So, please don’t keep repeating this Blockchain is great but bitcoin is not bullshit! Go educate
yourself first. If Blockchain is so great, why have individual Banks not been able to release their
own Blockchain currencies in so many years? Simple answer is, they cannot have a secure
private Blockchain. Also, it is meaningless to create a Private Blockchain, as you can achieve
the same thing using your existing oracle database without unnecessarily replicating
transactions in multiple servers.

MMM, Internet has pretty much destroyed every industry it has pitted against. Latest being
the retail apocalypse. Bitcoin is a nascent technology and will evolve with time. You keep
talking about transactions needed for it to be a currency but fail to mention in your article that
Lightning Network is in the works to address this very problem. Naturally sentiment plays an
important role in BTC’s price. Ultimately, Bitcoin’s functionality is what the digital asset should
derive most of its value from. Since we are still in the opening stages of the Bitcoin
phenomenon it is BTC’s perceived functionality properties that should drive the current price
action, not so much the mania and the speculation aspect. Although it is difficult to put a price
tag on the speculation and mania portion of BTC’s price, as sentiment strengthens in regards
to Bitcoin’s future functionality prospects the price should continue to increase.

This is only partially correct.

Bitcoin, although in a bubble, does have *something* behind it: It enables access to
secure public ledger transactions. (And very badly compared to other cryptocurrencies.)

Is this likely to be worth $20,000 long term? No. Is it likely to be worth $0? No. Is it
likely worth closer to $0 than to $20,000? Probably.

This is the same exact dynamic as tulip bulbs: Do tulip bulbs have a value? Absolutely.
But again, that value is likely to be closer to $1/bulb than $10,000/bulb.

A similar dynamic is at play with stocks: Is $1 of ongoing future earnings worth

sacrificing $1 today? Absolutely! that would be a PE ratio of 1. That means an implied
100% cash-on-cash return every year. What a bargain!
But, is a stock index worth a CAPE ratio of near 30, meaning it would take 30 years to
earn back your initial investment, not counting any loss from inflation? Heck no. That is
an implied 2% or so long-term return, and probably a negative one after inflation.

And it gets worse: Some large, popular components of the S&P have a PE of closer to
300, meaning it would take 300 years to earn back your initial investment. Some of
them have no earnings at all.

If you think that irrational bubble valuations in stocks aren‘t possible, then you just
haven‘t studied stocks long or hard enough to be investing in them.

 Regular money has nothing behind it either. Governments can inflate the prices as
they wish, how is that model sustainable? No, I am more inclined to trust economic
models where the rules are clearly defined and cannot be changed, by anyone, ever. I‘m
more inclined to trust contracts that cannot be broken. When contracts cannot be broken
nobody needs to oversee contracts. Nobody needs to worry about whether terms will be
met. A lot of jobs today exists only to oversee things. Guess what, we can automate all
of those jobs with cryptocurrencies. We can effectively automate trust. That is
something very valuable just like stocks are.

Reply

Danny Livewire January 3, 2018, 3:18 pm

It has the most powerful force in human history behind it: Mathematics

Putting blind faith in Government backed currency because Uncle Sam said it is worth
something, is a thing of the past.

Technology is always the game changer. Silicon Valley is out to eat Wall Street‘s
Lunch and this tech will defy all ideas of finance that have come before.

Justin, you are falling for the ―WhatAboutIsm‖ tactic that makes false equivalence. The
truly irrational.

Bitcoin has nothing behind it.

A stock is a share of an actual company, bound by rules and regs (however imperfectly
administered, at least they exist).
If you can‘t grasp the difference between the two, then by all means sink your capital
into crypto-currencies as they are currently valued. Lottery tickets might be a good
investment for you too.

Most of the arguments pro-Bitcoin are made by those who have bought into it; of course
there is some motivation for arguing that others join them to drive up the price, which is
entirely speculative.

We will see you on the other side of the crash.

PS: Brent, you write that ―if earnings don‘t pan out, stock prices won‘t necessarily drop.
They could also plateau until earnings catchup with prices.‖

What you are describing is called a ―silent crash‖. It is when stock prices stay the same
in nominal terms but everything else rises in price around them, effectively masking the
very real stock market crash through inflation.

This is exactly what happened in the 1970s: The nominal price of stocks remained
roughly the same while their effective purchasing power was cut more than in half

―…eventually prices will come back up. They always do.‖

Again, only in nominal terms. In CPI ―inflation‖ adjusted terms, 1999 index investors
have only very recently earned back their losses.

Priced in gold, they are still down more than 60%.

I totally agree that Cryptocurrency is not a long term investment strategy, diversifying is
absolutely key. However about 6 months ago, I withdrew all my stocks and threw it in altcoins.
I made 400% and pulled them out. I also invested in a bitcoin two years ago, and paid off all my
debt with it. I know have around $20k in crpyto having invested around $3500. So every time I
say Bitcoin/altcoins are a stupid idea, I chuckle. There’s no way I could have paid down my
debt and netted $14.5k in stocks in less than a year with less than $5k in capital.

I think it‘s a bit of stretch to call Bitcoin a Ponzi scheme. A Ponzi scheme is a
fraudulent operation designed to steal people‘s money. There‘s nothing fraudulent about
Bitcoin – it‘s mass hysteria driving demand. If I lie to you and take your money, that‘s
one thing. It‘s totally different when you lose your money by yourself.

Besides, there‘s value in bitcoin, like with gold or a comic book, or any other item
people assign a value to. The question is if one is worth $15k?
*

I’m not sure why the author is so angry at people who speculate. Speculation is essential to set
a market price for anything. It’s a constant struggle to find the right price. Everything that’s
happening in the crypto space is just so normal as you would expect investors struggling to get
the price right for something beyond the control of regulation. Why would the author call this
act stupid? How else should people behave? I don’t see any other motive behind this article
other than a biased effort to please someone, especially with the choice of words used like
‘stupid’, ‘ridiculous’, ‘holy shit’ – as if everyone who parked 700 billion on crypto belong to an
alien species.

I couldn‘t find anything indicating countries are using bitcoin as a reserve currency.

Reply

Daisy February 15, 2018, 10:59 am

I can‘t speak for the whole of Africa being simply a Kenyan but this is mega
horse shit. Many African countries have central banks. do not feed into this crap
that there is no banking infrastructure. Yes there is. While I was in Kenya, the
central bank had capped rates at 14%. Also, bitcoin lacks value in Kenya. Those
who are in it are using it for speculative purposes, not as a currency. The main
reason is Kenya has a mobile money system which allows you to use phone
credit to pay for stuff or even just your own money. I thought it was pretty
genius when back home.

Sorry this is completely wrong.

South Koreans are NOT moving all their currency in to Bitcoins. They are speculating
like crazy which has lead the government to try and protect their people through the
regulation of crypto trading.

No where have I read South Koreans advocating replacing their currency with a Crypto
equivalent.

Reply
 

Dave January 23, 2018, 6:13 pm

However, governments and institutions are investigating the uses of some

platforms, like Ethereum: https://globalnews.ca/news/3977745/ethereum-
blockchain-canada-nrc/

That is the right way to think about these things. As platforms. Maybe the
currencies will be useful to, but the really useful ones will be the ones designed
for some purpose. Even then, like with investing in a new company, you‘re
taking substantial risks.

But don‘t discount them too quickly.

Not likely, bitcoin mining farms are in China because of the cheaper energy costs. You
can‘t ―vote with your wallet‖ in this situation, so you have no control over what
practices the miners use.

I agree Cyptocurrencies will be powerful in the future, but I don‘t think that will be in
bitcoin. Bitcoin is the viral buzzword that has the momentum. But with 6-7 big mining
players who dictate which fork of bitcoin to mine, the value of BTC or BCC or Segwit
or whatever else comes, I have no faith in the value of BTC.

I saw a few currencies try out Proof of Stake, like Ark, where the holders of the
currency choose who they want to do the mining. Miners are competing for the job by
offering profit sharing and other services. Iota and RaiBlocks use something different
than the blockchain to make each user a miner by requiring each transaction to verify
other transactions which prevents transaction fees. We will have to see if that new
blockchain style will win out.

Well then Biglaw Investor, you‘d better stop using websites or stop supporting any
company that does big data research, because that‘s consuming considerably more
electricity and it‘s not fundamentally vital to us existing.

Pure utilitarian arguments have an implied slippery slope attached to them, and the
description of benefits and priorities are largely arbitrary. Crypto currency as an
ecosphere financially has benefited the tech industry dramatically, and if you invest like
Mr Money Mustache advises, that means you probably have a good amount invested
into the S&P 500. How‘s that Nvidia stock doing now that GPU sales have been
skyrocketing this last year giving them two record years in 2016 and 2017? Well that‘s
all due to the crypto currency craze. That in turn creates tax revenue, prosperity in a
worrying economy for people‘s investment portfolios, etc…

It‘s not as simple as you make it personally.

Bubbles or Tulip Mania as you put it don‘t do what bitcoin has done since its inception
in 2009. I have seen several bubbles grow and then burst, and one thing you learn is that
an actual bubble rises like crazy and then totally pops. It doesn‘t come right back a
couple of years later and soar again to a new price 10 times greater than the previous
bubble‘s high, which is what bitcoin has done after each one of its three or four previous
―bubbles‖ burst. That‘s not a bubble, but something else entirely. Let‘s take the oil price
in the middle of the last decade as an example of a real bubble. The price went on a
historic and seemingly unstoppable run all the way to $150 per barrel in 2008. It then
proceeded to burst in spectacular fashion just ahead of the financial crisis, plunging all
the way back to $30 before rebounding. Ten years later and the price is still nowhere
near that prior high, with it currently trading around $60. That‘s what happens when a
real bonafide bubble bursts. It stays below the prior high for decade at least, sometimes
forever. The behavior of bitcoin since the ―genesis block‖ has been completely different.

While we‘re on the topic of bubbles, it seems the truly gigantic bubble in the world isn‘t
bitcoin, but rather the global debt market. This leviathan now stands at around $233
trillion, or 318 percent of global GDP. Even more troubling, an estimated $11 trillion of
government debt now trades at negative yields. This means whoever is buying this
paper is doing so despite the fact they are guaranteed to lose money on the ―investment.‖
Much of this buying has been propelled by central banks which can print their own
currency and buy debt indiscriminately. This is not characteristic of a healthy financial
system (particularly so many years into a global recovery), but rather a zombie one
that‘s been artificially propped up since the financial crisis.

You have unwittingly tripped up your own argument here. In stating that humans have never
had a chance to own their own money you have hit on the essential problem with bitcoin and
any other monetary alternative. Every currency has something behind it. In the US we call it
the “full faith and credit of the United States”. In short this is nothing more than trust. Why do
I trust the dollar? Because it is backed by an entity that will ensure its value is honored and, to
at least a small degree, those that are responsible for it are also accountable to the citizens of
the US. The reason that people have never “owned their own money” as you inelegantly put it,
is because there is no “full faith and credit” under this model. Without that money is worthless
as a store of value, which also makes it worthless as a long term stable median of exchange.

Basic Economics Vijay. Money only has value if it is stable and trusted. You expect a
currency that is ―controlled‖ by individual owners can be reliably used across national
boundaries? Why would anyone do business with a medium of exchange that is
accountable to nobody?

Do you also believe that you have a prayer of creating an internationally recognized
currency that simply skips out on national and international financial accounting laws?
If so, congratulations. Your entire new medium of exchange is part of the black market.

Cryptocurrency could be the proverbial cure for cancer, but if it‘s made illegal or
heavily regulated through prudent or reactionary legislation (YMMV) it doesn‘t really
matter, does it?