You have heard about the ever rising price of Bitcoin, right? There has been so much noise about it in the media lately that I doubt you’ve missed it. While the price of Bitcoin has been going up, I’d still don’t think it has any value. Please read this, and other analyses, before you do something rush like withdraw your pension fund to ‘invest’ it in Bitcoin; or use your credit card to buy Bitcoin.
Have you ever had the feeling that you are missing out on something?
For me missing out is not just a feeling; it is a constant part of my existence.
I belong to a group of people who could rightfully be known as ‘the missing out’ generation. Because the Boomers had the Beatles; my generation had Bonny M. You see what I mean?
And if this were not enough, my generation is also likely to miss out on retirement and the National Health Service.
Lately, I’ve been asking myself whether I’m missing a trick (or two) with Bitcoin (and other crypto-currencies) as well. Just look what’s been happening with the price of Bitcoin lately.
You know me; when I get this feeling it means it is time for some research, thinking, writing and a decision. Usually in this order.
After doing quite a bit of research on Bitcoin I’ve decided it is not for me in the long run. In fact, I’ve decided that I’d rather buy me some gold sovereigns and keep them in the safe under my bed than get involved seriously with Bitcoin.
If I decide to take advantage of the rising price of Bitcoin, I’d do it just like I’d gamble in a casino: with care, control and readiness to get my (money) nose blooded. (I haven’t seen the inside of a casino, brick and mortar or virtual, for a very long time now – being a compulsive gambler in remission demands its sacrifice.)
Today I’ll tell you why I don’t intend to get involved in Bitcoin in any serious way.
But first, let me tell you a bit more about Bitcoin.
What is Bitcoin?
Bitcoin is a new kind of currency. Known also as crypto-currency it is virtual and, in my understanding, works in a very different way to the existing currencies.
Bitcoin was created in 2009 in an obvious attempt to bypass banks, national governments, trans-national regulatory bodies (IMF, for instance) and any other kind of political authority.
Bitcoin is a currency best suited for transactions on the internet although, as I’ll specify later, many shops (even more traditional shops) have started using it.
What are the main differences between Bitcoin and, let us say, the British pound – or any other traditional currency for that matter?
I believe that these are the seven main differences:
|
Bitcoin |
British pound (e.g. traditional currency) |
|
| Link to economy | None | Moderate to Strong |
| Inflation | No | Yes |
| Ways to earn | Purchase or mining (complex algorithm) | Sell labour, invest or speculate |
| Ways to spend | Electronic encrypted wallets | Notes and coins, and cards |
| Security | High | Moderate to low |
| Purchase trail | None | Considerable |
| Geography | Global | National/regional |
It seems to me that there are two differences that need clarification.
One, Bitcoin has no apparent relationship to the economy and the currency operates based on math; the algorithms are set so that there can’t be more than 21 million coins. This means that the relationship between the currency and the economy is not dynamic but fixed; and it is fixed on the currency side.
Now, while I believe that ‘traditional’ money left the economy just like the traditional Gods left nature, I also believe that there is still a dynamic relationship between the economy and money that allows us to make adjustments to either. This comes really handy at times of crisis.
And two, Bitcoin in difference to more traditional currencies is not earned by selling labour, investing or speculation but is either bought or mined using complex algorithms that require considerable computing power and, I suspect, a fairly high level of technical competence. At the moment one Bitcoin is about $1,000 and most places where you could buy the currency will offer you less than one Bitcoin. I also doubt very much that many people could successfully mine Bitcoin but we’ll talk about this one later.
How to use Bitcoin?
#1. How to use Bitcoin as money?
From what I gather, this is not entirely straightforward.
With ‘normal’ currencies you work, you get paid, you use the money to get stuff. You can do it by using notes and coins (real money) or using proxies like debit and credit cards.
Bitcoin is not like that. To start, you don’t get it from an employer or for work you’ve done. You have to buy it and/or mine it. There are dedicated marketplaces (Internet platforms) to do that and it is very important to do research as to their trustworthiness.
Please, if you decide to go for this Bitcoin lark, make sure that you do research carefully the marketplaces available.
To buy and use Bitcoin you need to:
- Open an account;
- Set your electronic wallets; and
- Create and remember levels of passwords.
There are five types of digital wallets you can have (most people talk about more than one type of wallets as the perfect set up):
- Desktop Wallet: you store your Bitcoin stash on your computer;
- Online wallet: this is usually one you can create with the Bitcoin marketplace;
- Wallet App: well, it is inevitable to have an app, isn’t it? Still, rather handy to use Bitcoin in high street shops or give them to someone else who has a wallet app.
- Hardware wallets: these are muted but have not been seen yet.
- Crypto-currency wallet: this means you can have other currencies than Bitcoin in your wallet.
Next, you just have to find the places (and things) where you can use Bitcoin (and other crypto-currencies). Just Google this one (no point having a dog and barking yourself).
#2. How to use Bitcoin as speculative investment?
Because of its nature – Bitcoin is speculative be default – this currency is very volatile. Drops and increases in price of up to 30% over a week are not unusual. Where there is volatility people will try to make money from it. Were you the kind of person who dabbles in FX Trading there are opportunities here. Again, be careful and don’t bet more than you can afford to lose.
Because of the increase of price of Bitcoin, it is being used as a traditional ‘value investing’ vehicle. On this I’d place a very big caution sign as well. Value investing works because the businesses you invest in have value in the first place. Next, it works because you buy shares in under-valued business the value of which increases.
The problem with Bitcoin is that its price increases, not its value.
Were you to decide to test Bitcoin as a speculative investment be ready to jump off the train; or, failing that, to get to a place you’d rather not be.
What can Bitcoin be used on?
This is relatively simple: on more and more things.
Shops – both virtual and high street – have increasingly started to accept Bitcoin. My search shows that I could:
- Buy as many handbags and shoes as I wish, were I in possession of some Bitcoin
- Reputedly use Bitcoin at some Farmers’ markets (doubt any of these are in the good, old North of England but may have another look)
- Shop on Amazon for…well, pretty much anything
- Buy things and services that WordPress offer (apparently a way to serve customers from countries blocked by Paypal and credit card companies)
- Bitcoin is so fly that Richard Branson accepts it for booking flights in space
Several online casinos are also looking at the possibility of allowing players to wager with the currency as, examined in the article The Future of Bitcoin in Online Gambling. The use of Bitcoin certainly offers unique opportunities through the irreversibility of payment (remember the Omani lady who refused to pay over a million gambling debt?), anonymity of transactions and the global character of the currency.
I suspect that the use of Bitcoin will continue growing but I’m not sure whether it is ever to become real competitor for more traditional currencies or stay as a complement to these.
Why Bitcoin is not for me?
Now, having told you what my research of Bitcoin and its use generated, let me tell you why my choice is not to get involved with it at this stage.
#1. Bitcoin is pure speculation
When I say ‘pure speculation’ I mean it is a bit like magic; or Medusa; or any of the mythical beings your imagination could conjure.
You see, once upon a time money was a true part of the economy and a measure of its value. There was the ‘gold standard’ and a solid foundation for the money that circulated in the economy.
Next, just like the ancient Gods left nature and retreated to ethereal locales, money left the economy. This is the time of ‘fiat’ currencies where the gold standard no longer plays. Still, fiat currencies are backed by ‘political’ will and agreement.
With the advent of Bitcoin, we see money that has no foundation in economy, the state or political convention. It is pure speculation in that there is no value behind it (there are serious costs to mining Bitcoin though).
This is how Bitcoin is ‘pure speculation’ and looking into its future is like looking into an image conjured by a complex system of mirrors – we don’t know whether the mirrors will continue standing and we don’t know which ones will fall. We are only left with a feeling of uncertainty.
#2. I still trust the economy more than math
This is not to say that I trust the economy as a grounding for currencies a lot but I still do more than I trust in math. I am aware this sounds a bit abstract and touchy-feely but…
…for me, money is a mediator between the value we contribute through work and the value we chose to consume through purchases of goods and services.
Bitcoin is as far from that as Jesus is from an Ancient Greek prostitute.
On the other hand, it is possible that dabbling in Bitcoin is much more change than I’m prepared to cope with at the moment.
#3. It is too much of a lark
I don’t mean to be dismissive of Bitcoin (or any crypto-currency) here but the whole thing sounds like too much of a disturbance and change of routines to me.
Buying it, mining it (if I even manage to figure this one out), setting up wallets, looking after your computer and portable electronics…well, too much fuss for me.
I may change my mind if this becomes a bit easier and straightforward; in other words, when Bitcoin gets a Google.
#4. Middle aged people start forgetting things
Yeah, as much I hate to admit it, I’ve reached an age where remembering 20 different and complex passwords is not something I can do with ease.
I fact, I need to ask for my password to be sent again and changed fairly regularly (then again, I did this ten years ago as well so maybe I’m just a bit absent minded).
If you forget the password for your digital wallet, that’s it. You’ve lost your Bitcoin.
I may need to carry my wallet around my neck soon (so that I don’t lose it) but I’d rather risk a mugging than see my money disappear because I’d forgotten the password.
#5. No refund is no good
There is no refund when you use Bitcoin.
What if you make a mistake? What if you find that what you bought is not appropriate after all or that the goods are damaged?
Nothing!
You are stuck with what you’ve got.
#6. No inflation is not too good either
No allowing for inflation is one of the things Bitcoin is praised for (there cannot be inflation because of the limitation to 21 million coins). This is problematic in two ways:
- Inflation is a symptom for the health of the economy just like fever is a symptom of the having the flu. Similarly, inflation can be used as an avenue to healthy economy and markets, just like fever kills viruses.
- Potentially, limitations in currency can lead to persistent inequality. In other words, what happens when ten people end up with 17 of the 21 million bitcoin? Frankly, I wouldn’t like to live in a world where this is the case and I’d leave it to you, my dear reader to figure out why.
#7. There is inbuilt inequality
Bitcoin seems to be the currency of relatively wealthy, highly educated people from the developed world.
Why?
Because to acquire and use it, one needs a lot of computing power, high level of competence (education, understanding and practice) and very developed infrastructure generally.
In other words, you can’t use Bitcoin in an African country where the electricity fails and the internet connections are far from perfect. I also suspect that mining Bitcoin is for geeks and I don’t have this advantage.
#8. Possibility for immoral and illegal use
People have been saying that not leaving a trace is a one of the great advantages of Bitcoin.
Thinking about it, I’m never bothered about leaving a trace of my purchasing behaviour. Not even when this is used to profile my consumer profile because I have free will and can reflect (and ward off) attempts to manipulate me.
Let people know that I’ve bought some groceries, handbags and bras if that is what rocks their boat.
If I were buying drugs, weapons and other things that can be even more objectionable than these then I’ll be concerned about leaving a trace.
In fact, there have already been high profile cases of busting websites that sell drugs and weapons using the anonymity that Bitcoin affords.
Finally…
I find Bitcoin to be a fascinating development; it may even be the next step to match developments in the ‘network’ economy.
I can see how transformative Bitcoin (and other crypto-currencies) may be.
Would I dabble in using Bitcoin any time soon?
No. I’d rather buy some gold sovereigns.
Would I take advantage of the rocketing price of Bitcoin and use it as a speculative investment?
Well, this is a story for another night, right?
For me, it seems it is treated like a commodity or foreign currency. The value floats and it seems speculative at this time. I may miss out on an opportunity, but I am also missing the risk.
@Krant: My feeling exactly.
I never looked into Bitcoin…just distrusted it and avoided it. Now I feel justified in that decision, LOL. Thanks!
@Crystal: You remember I said the I may be wrong, right?
I looked into it a few months ago and just couldn’t wrap my head around it! I see so many services now accepting it as payment too. I think I just need to stick to the old standard when it comes to money.
@Jon: Yes, I did ignore this one for a long time as well. For me, it was an artificial currency used for speculation and this really made it clear – I stay out of it. Then I noticed places accepting payments and met people using it to pay for stuff. This is where all this research and thinking came from. My action is the same – stay well clear of it – but now I know exactly why I’m doing it :).
Mr. LH looked into bitcoin earlier this year and the one thing that scared us away was the fluctuating price of one bitcoin. The volatility isn’t for me.
@Little House: Yep, this is a problem as well. It seem to me, the volatility comes from the fact that it is even more ‘fiat’ than the establishe fiat currencies we deal in every day. It is pure speculation.
The volatility in price of a bitcoin is a major problem with the virtual currency being accepted on a larger scale. I’m curious as to what the World Bank thinks about virtual currencies?
@Paul: Ah, an interesting question. And as it happens you are in luck; apparently there is a newly published World Bank report in which Bitcoin is classed as ‘Naturally occiring Ponzi Scheme.’ Which is good because it is not a ‘proper’ Ponzi :). I rather enjoyed this quote because it shows I’m not wrong in my analysis:
“So Bitcoin isn’t a currency. It is [by the way] a Ponzi game and a conduit for criminal/illegal activities. And it isn’t safe given hacking of it.”
What a great crash-course on Bitcoins. I always thought they were a fascinating currency but shady at the same time because the mechanism surrounding them is so un-approachable by the common man. I think it’s easier for a common person to understand and invest in derivatives rather than Bitcoins. And I was shocked to read that your Bitcoins are gone forever if you forget your password. Kind of unfair, isn’t it?
I’ve avoided bitcoin largely because of point #7. I don’t personally care what people know about my buying habits — but I don’t want to have to worry about whether my buying habits combined with the transactions being on bitcoin will raise a red flag somewhere. I’ll pass.