WE covered the Bitcoin issue three weeks ago, and despite me saying it could get to $20,000, I didn’t think it would be that quick (it was $7,200 at the time).
Whilst Bitcoin could go further, you have to understand the basis on which you are buying it and how it’s valued, and I have yet to meet anyone who could provide me with that answer – anyone. Anything other than that could mean you losing your shirt.
Like many bubbles, people are buying based on ‘the fear of losing out’ and are sucked in by the age-old pattern that bubbles follow. When the guy at the pub is telling you how much he has made (having read it in a planted post on the internet), and you believe him without checking, it’s getting to inflated bubble territory.
The flurry of questions I’ve received is the reason behind the title above and here are some of the answers.
Firstly – Will Bitcoin survive and be ‘useful’ as a ‘currency’?
That’s a great question and helps me separate the usage of Bitcoin, and it as an investment.
Yes, it’s a very valid proposition unless it’s manipulated out of the market, but yes it will, and if and when Amazon decide to use it along with others (expect that), it will soar again until it doesn’t, and the speculators move on to the next thing.
I can see its benefits and would use it without a doubt, but you need to know it’s not the panacea it’s made out to be.
I regularly repeat ‘confirmation bias’ and this is no different. The education system has taught us to stay with the herd, to not be right or wrong and think independently, and so we follow that herd and ‘believe in a currency, political party, football team, Brexit or Remain’ and read and socialise with those who believe the same, un-friending or un-following anyone who doesn’t match.
Confirmation bias, not education, is how we end up with bubbles.
Holding opposing views in your head (especially on crypto-currencies) is tricky, given the shear amount of data involved, along with answers/info to questions you didn’t even know existed.
I have, however, sat through a presentation where no valuable data came out of it and everyone around me asked if I was going to invest – looking for the thumbs up, yet they knew nothing and would have.
This is nothing more than greed, or the fear of losing out – non-viable options on making money, and no reason to be self-congratulatory if you do.
Bitcoin isn’t easy to use, it isn’t predictable, it is slow, and how many people around you know how to use it? Its energy usage is awful (how coins are mined), the number of payments that can be handled is low, and what happens if you lose your password or wallet – gone forever.
That’s way too much for the average user, and so moving from early adopters to the masses (the adoption chasm) currently seems unlikely, unless bigger steps are taken. Early adopters see it, but the masses won’t read Reddit every day to keep up, nor will they want to keep up to date with exchanges, wallet updates et al. It’s a long way off taking the jump over that adoption chasm. See ‘faith’ below.
What’s its real value? Errr nothing really, but that’s as true of any promissory note as it is of gold per se. Eventually something is pegged to something and that something may be just as valueless, but at best it’s still somewhere around the $1,200 based on usage. I don’t expect it will drop back there as usage picks up with euphoria and it catches up with the current price range achieved over the last few weeks.
Explaining my promissory note above - referring to its ‘promise’ on its own currency - the Bank of England state clearly that ‘parties to transactions need to have faith in the value of a banknote and what it represents’, and that ‘public trust and confidence in the currency is essential to the functioning of the economy’. Link the two ‘currencies.
Next time I will look at how Bitcoin is valued and where are the ways to make money on it.
:: Peter McGahan is the owner of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. Have a question on investments or pensions? Please call Darren McKeever on 028 6863 2692, email dmckeever@wwfp.net or visit us on www.wwfp.net.
