Bitcoin has been subject to intense media attention in recent years after the cryptocurrency increased in value by roughly $30,000 in just 3 short years.
Some of the investors that were lucky enough to benefit from this surge have become mutli-millionaires, while others have lost huge sums of money as they have tried to jump in on the trend.
As a consequence of said hype, many amateur investors have contemplated investing in bitcoin, driven by the delusion that it will help them to get rich quick – which is a widely held perspective when it comes to investment.
Whether it comes to bitcoin or more tradition stock market investments, the urge to get rich quick is typically the downfall of most retail investors.
Wealth creation is a long, drawn out process that involves patience, discipline and consistency. Anyone that tells you otherwise is probably trying to push you into making a really bad decision or are not adequately qualified to advise you on the matter.
As an investment advisor myself, I have been asked countless times whether an investment in bitcoin is a good idea or not. In this article, I will outline why most investors should avoid bitcoin at all costs.
If you don’t know already, bitcoin is a cryptocurrency.
Sometimes that can confuse people, especially when terms like ‘mining’ are used to describe how individuals acquire them.
Bitcoin is essentially a currency like the US dollar or Japanese Yen that can be used to buy and sell goods or services. However, the key difference is that it is a digital currency that does not have a central bank.
As bitcoin, like other cryptocurrencies, does not have a central bank, it could essentially be considered a global currency. This simply means that it is not directly linked to any particular country.
Here in lies the first problem.
The value of a traditional currency is driven by information that relates to a country. If the GDP of the United States goes up, for instance, the value of the USD will increase as long as the American economy has grown at a faster rate than other nations.
For example, if the US Dollar is valued at £0.50 and the economy grows 10% larger than the British economy in the following year, the USD dollar may be valued at £0.55 instead of £0.50.
To keep it simple, if you exchanged $10,000 before, it would have been worth £5,000. After the 10% growth it would be worth £5,500, £500 more than before.
This clearly shows you how currencies are valued and how their values change in accordance to real life information.
With regard to bitcoin, the reasonable question to ask is: ‘what is driving the value of a bitcoin?’
As there is no underlying data that is driving the value of the currency, the answer is nothing. The price of a bitcoin is simply driven by speculative market forces, rather than any particular underlying data.
This means that the only reason that bitcoin is going up in value is that investors are buying in mass, hoping to jump on the trend. When things don’t work out, there’s a huge sell off, which is exactly why bitcoin went from $20,000 in December 2017 to $3,000 in December 2018.
The extreme volatility of bitcoin mirrors the greed and fear that drives the value of the currency.
Unfortunately though, the media only cover bitcoin when it hits record levels or when it has increased in value significantly. This simply has the action of pushing the value up further as more and more amateur investors want to jump on the trend.
As you have read, the most significant reason to avoid bitcoin is because there is no underlying data that is driving the value, it is simply the greed and fear of speculative investors that are driving the price.
This does not reflect an investment, it simply represents a gamble. Investing in bitcoin is therefore comparable to taking $30,000 to the casino and putting it on red or black at the roulette table.
With that in mind, another point to consider when it comes to bitcoin is its utility, which is often for criminal purposes.
Bitcoin involves a technology called blockchain which allows users to anonymously make transactions. This opens the currency up to illegal activities like buying banned substances or undertaking money laundering.
This poses another risk to investors, whereby future regulations and legislation may put the use of cryptocurrencies to an end, diminishing the potential ‘value’ of currencies like bitcoin.
Of course, use of bitcoin is more or less anonymous, so it may take time for authorities to make adequate regulatory provisions to prevent its use. This doesn’t mean that investors should ignore this risk however.
The final point that I want to make in this article is to make new investors fully aware that the finance industry has not bought into the cryptocurrency hype.
JP Morgan CEO, Jamie Dimon, described bitcoin as a ‘fraud’ and that the people buying it were ‘stupid’. Warren Buffett warned investors to stay well away from it as it is a ‘mirage’.
Buffett claimed, much like I am in this article, that “the idea that [bitcoin] has some huge intrinsic value is just a joke”.
If bitcoin was such a huge investment opportunity, be assured that all the major investment banks and hedge funds would have jumped on board. They haven’t and there’s a reason for that.
I hope that you found this article useful, if you did I’d really appreciate it if you share it with your friends.
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