Saturday 26 August 2017

Is Bitcoin an investment?

Bitcoin doesn’t show any signs of going away. In fact, the growing hype about it just makes it more and more appealing to people. The problem is that most of us know so little about this new currency that we’re open to being exploited by those who see Bitcoin as an opportunity to make money from us rather than from Bitcoin itself.

So let’s start at the beginning. What exactly is Bitcoin?

Bitcoin is a currency, but it’s not like any currency we've seen before. With Bitcoin there are no coins or notes, no bits of metal or paper you can put in your wallet or purse. This currency exists solely in cyberspace. It's a digital currency, sometimes called a virtual currency or more often a cryptocurrency. ‘Crypto’ refers to the fact that Bitcoin transactions are kept encrypted online.

The biggest problem about Bitcoin is that it’s confusing. As soon as you start researching Bitcoin you encounter terms like "blockchain", "distributed ledger" and "Bitcoin mining" and they’re hard to understand for us amateurs. There's also the confusion that your money is "out there" in cyberspace and not in your pocket. That's something new and hard to comprehend.

In fact the "out there" element is very new and innovative. The blockchain, an online database of Bitcoin transactions that records and confirms every transaction ever performed between people using Bitcoin, is hosted all over the world, not in one place. There is no central repository of these transactions, they’re all over the place. That’s the “distributed ledger”.

Then there are the so-called Bitcoin Miners, the people who run the computers on which the Blockchain is hosted. These miners, using enormous computing resources, can earn themselves Bitcoins by holding and verifying the transactions but it's important to know that the required level of computing power required to be a profitable data miner is way beyond individuals like you and me and can only really be achieved by "mining farms" with enormous processing power and energy consumption.

As I mentioned, one of the most important elements of Bitcoin is that it’s encrypted and as a result it’s currently extremely difficult for banking and intelligence agencies to track the payments that are made using Bitcoin. It’s effectively impossible to see what someone is buying or who they’re paying. Whether it’s you buying a plane ticket or your neighbour buying drugs, child pornography or explosives, the transactions are untraceable. For some that allows them some reasonable privacy, for others it’s a great way of hiding criminal and terrorist activities. This scares law enforcement agencies all over the world.

Despite all these issues I suspect that Bitcoin, or maybe something like it, might be the future of money. Many of us already use international online payment systems such as Paypal and Apple Pay and local money transfer services like eWallet, MyZaka and Orange Money but they're all based on currencies that we know. Bitcoin is the next step along the monetary evolutionary staircase. Not only is it an online payment mechanism but it’s a currency of its own.

But it's highly risky.

Bitcoin is still so new that even financial experts have no idea of what it's future will be. Some are already saying its days may be numbered. What's more, and despite what some proponents are saying, its value can easily go down as well as up. If you bought Bitcoins in November 2013 you would have lost 78% of your "investment" by January 2015. Before anyone criticizes me for using those figures I admit I chose the highest and lowest values but my point is that it's volatile. All currencies are volatile but Bitcoin is clearly even more volatile than others.

Today the value of a Bitcoin has increased dramatically again. At the time I’m writing this, the value of one Bitcoin is over $4,000, more than twice the value it had three months ago. Those of us who were considering buying a few months ago are probably kicking ourselves right now but does that mean we should buy into Bitcoin now? Just because the value has increased so much recently, that doesn’t mean that rise will continue any further. In fact, while many people are encouraging us to “invest” in Bitcoins, many others are warning against the same thing. There is absolutely no guarantee that Bitcoins will continue to increase in value, no guarantee that it won’t crash and burn.

The biggest complication that worries me is that Bitcoin is surrounded by scams and people desperate to exploit our ignorance. On Facebook you’ll see a number of advertisements for people making the most of the Bitcoin name. For example, I saw an advertisement announcing the “Bitcoin Revolution with BitClub Network” at a hotel in Francistown next month. The ad proudly displayed images of the three “Bitcoin Entrepreneurs” who would appear at this revolutionary event and that amused me. Is there such a thing as a Bitcoin Entrepreneur? Is there such a thing as a Pula entrepreneur? A Dollar entrepreneur? A Rand entrepreneur? Of course not.

You have to ask yourself this. If someone came to your town and advertised a seminar on making money from the US dollar, would you think of attending? You should also ask yourself this. How do these “Bitcoin entrepreneurs” benefit from you attending the workshop or joining their scheme? If they have a way of making money from Bitcoin, why are they offering to share it with you and me? Doesn’t this sound a bit suspicious to you? It certainly does to me. In fact, my view is that BitClub Network shows all the signs of being a pyramid scheme. The reason these people are trying to recruit other people is that they make money from new people joining rather than from the value of Bitcoins.

My recommendation is simple. If you’re tempted to “invest” in Bitcoins then do so but understand that it’s a very high risk place to put your money. Like any other such investment you should only invest money you can afford to lose. Don’t invest the rent or your loan repayments and don’t trust anyone who wants you to join their Bitcoin scheme.


Note: In the print version of this article I erroneously referred to "Data Miners" instead of "Bitcoin Miners".

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