Bitcoin: Considering the downside to the high profile cryptocurrency
In the third and final column on Bitcoin or ‘coins’ for that matter, I’ll cover their downsides.
In 33 years of financial services, confirmation bias, fear of missing out (FOMO), and emotional intelligence are the potent concoction that allows for a disastrous perfect wave.
Attaching to a previous price or other mathematical ‘logics’ are a great way for someone to sell you an expensive set of last year’s deely bobbers. They even had a name!
Because Bitcoin reached $42k and is now $37k, does not represent a bargain - until it does in history. That’s the hook of FOMO.
That, coupled with the online anonymous chat, or what used to be in a bar, is enough to railroad many into making the wrong purchase at the wrong time.
Bitcoin and others are highly speculative, as their price doesn’t follow any economic fundamentals – precisely the attraction that many have for it of course.
A price that rockets simply because Elon Musk alters his twitter bio to include its hashtag, is somewhat of a mystery, and because you are investing into the ‘unknown’, prices can be very volatile.
Coins are here to stay in some form, but as to their store of value, I’m not sure.
Bitcoin has been sold as the move away from central control, from the ‘inappropriate’ interference in our buying power, our lives and our wealth. If you control money supply, you control pretty much everything.
The fact that 2.8 per cent of bitcoin addresses control 95 per cent of the supply should pop that bubble.
Most of us agree that money is just an efficient bartering tool:
‘My brain surgery is worth ‘X’, your amazing football skills and lovely hair is worth ‘Y’, so here’s some tokens to help you go barter for a pint and some chips.’
Money has become much more than that, and inappropriate behavior of course, can wipe that bartering value off the slate.
Those who like coins, don’t see money as anything to do with a government and reject their ‘interference’.
It is for that reason that our money is called Fiat money, Fiat being the Latin for ‘determined by authority’.
Others might argue of course that money is, and will be a tool of governments and they have the ability to keep it that way.
Any ‘coin’ can easily be heavily taxed, banned for some reason or another.
Whilst privacy rules have changed, if it is so private, how can it prove it is, or isn’t, being used for the wrong reasons.
Governments can easily move to ban or tax it rendering its ‘value’ as an investment, valueless, but its usage still viable as a transfer of barter, so to speak – X coins for Y service/product.
Unlike an economic investment, Bitcoin’s value relates to technology - computer generated tokens through complex algorithms. Such ‘keys’ are mined, come into existence and have a ‘value’ which can easily be pumped and dumped.
Because there is a finite amount, that value increases. Yes you are correct, that doesn’t make sense at all, because it doesn’t.
But then I could easily argue that gold doesn’t have a value just because there is a finite amount of it, and why is it seen as a safe haven?
The narrative or belief is that because there is a finite supply, it can’t be printed (and devalued) like Fiat currencies.
Gold above the ground was 198,000 tonnes in 2019. There are c57,000 proven tonnes below.
Those who believe in Bitcoin as the rage, see gold’s value at c$17tn as a measure of how Bitcoins current value of $0.6tn can move. That’s undoubtedly gluing jelly to a tree. That’s not to say the price wont move upward (it will) but not to that logic.
There is a final belief that when others begin using coins, the value will rocket (e.g. Amazon).
Amazon control 47 per cent of the US market share of E-commerce. That US revenue alone is half Bitcoin’s current value.
They could just announce their own ‘coin’. Bubble burst.
:: Peter McGahan is chief executive officer of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have question on sustainable investing, call Darren McKeever on 028 6863 2692 or email email@example.com or visit https://www.wwfp.net/