Do we invest in Bitcoin or not?
Bitcoin is a highly volatile cryptocurrency with a track record of “boom and bust” cycles – when its price soars and then crashes back to earth.
Bitcoin had been firing on all cylinders in 2021, hitting an all-time high in April. However, the price plummeted after Elon Musk tweeted that Tesla will no longer accept cryptocurrency due to environmental concerns and China announced further crackdowns in May. Not only are there fundamental issues with bitcoin, but there are also mining issues as well which many people don’t understand.
Bitcoin’s growing energy problem… ‘It’s a dirty currency’ – Elon Musk has highlighted the cryptocurrency’s environmental impact and governments are starting to take notice. The cost to produce is quite expensive.
On the shores of Seneca Lake in upstate New York, a private equity company has bought a decommissioned coal power plant and converted it to burn natural gas. It then switched it back on to become what it describes as a “power plant-cryptocurrency mining hybrid”. Greenidge Generation Holdings, the company behind the plant, plans to go public later this year, saying it expects to become “the only US publicly listed bitcoin mining operation with its own power source”. It is looking to buy more power plants and vastly scale up operations.
Climate activists, however, are aghast that fossil fuels will be burnt to mine crypto, and are pushing regulators to clamp down on this and other similar projects to prevent a surge in greenhouse gas emissions.
Seeing how cryptocurrencies are mined and why they need energy to do it, Elon Musk, who originally loaded up his corporate coffers with $1.5bn of the cryptocurrency recently changed his mind and reversed plans outlined in February to accept bitcoin for payments for his vehicles. “Cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at great cost to the environment,” he said. Musk has simply pointed out an established truth, albeit in his eccentric manner. It is a question so far largely ignored by governments, by heavy-hitting environmental charities, and by the banks and exchanges that facilitate the vast cryptocurrency industry. “Bitcoin alone consumes as much electricity as a medium-sized European country,” says Professor Brian Lucey at Trinity College Dublin. “This is a stunning amount of electricity. It’s a dirty business. It’s a dirty currency.”
I’m not saying that cryptocurrencies will fail because of the dirty mining however if the world wants to go cashless, this may be one of the options. In fact, it is quite obvious that the future of currencies is digital and crypto is simply a particular way of operating a digital currency.
I’m saying that bitcoin will fail. I have seen articles that use bitcoin and cryptocurrencies as synonyms, but that’s a mistake. There are thousands of cryptocurrencies and bitcoin is just one of them. It is the earliest one, so it is the most well-known, but I believe there are serious problems with bitcoin that will cause it to fail. Here are the top reasons.
There is no real value
Some people say that fiat money (which are the normal currencies that we all use today) also does not have real value since we moved out of the gold standard. This is incorrect. Fiat money has the value of the guarantee of the government that issues it. In fact, on the Indian rupee note, you will see a “promise to pay the bearer” issued by the RBI governor. In the US dollar, you will see the words “legal tender”, which means the same thing. Governments have the power to tax their people and businesses, the ability to sell public assets, issue bonds and other ways to guarantee their currencies. These are formidable powers that give the confidence that the value of the currency will be there.
Stocks have real value because of the companies’ ability to create profits from the goods and services that they sell. Commodities have real value because industries purchase them as raw materials to use in the production of goods and services.
The only value that bitcoin has is in somebody else willing to pay a price for it. In that sense, it is like a piece of artwork. But even a piece of artwork has the ability to beautify the space that it occupies. Bitcoin doesn’t even have that.
There is no stabilizing force
Fiat money is heavily defended by the government issuing it. Central banks go into the international monetary markets to perform “market operations”, which is to buy or sell their national currencies in order to keep them stable. Without stability, a currency does not work.
Bitcoin’s volatility makes it a terrible currency. It doesn’t matter how many vendors profess to accept it. Just think of it this way: if you have bitcoin, will you use it to purchase anything? You won’t. You would just use fiat money. That is because you didn’t buy bitcoin to use as a currency. You bought it as a speculative investment hoping that it would go up in value. You wouldn’t pay in bitcoin because your fear is that two weeks later, bitcoin’s value goes up by 20%. For the same reason, when bitcoin starts to slide, vendors will stop accepting it as payment, because they don’t want the value to go down by 20% a week after.
It is in competition with national currencies
Supporters of bitcoin say that it will replace fiat money. If this has the remotest possibility of becoming true, it means that bitcoin is in competition with national currencies. Can we really imagine the central banks of China, the US and the EU saying “let’s cancel our currencies and just use bitcoin, which no one can control”? This would be fatal to their monetary systems! As we have seen in recent days, China has banned bitcoin trading and mining. Various other countries have also hinted that they would be following suit. So no, countries will not adopt bitcoin. They will issue their own versions instead and then ban bitcoin.
Investing in bitcoin is not investing in blockchain tech
There are cryptocurrencies, known as stablecoins, which are backed up by real assets (such as the US dollar) that use the very latest in blockchain technology. These coins are much more suitable to be used as currencies because they only fluctuate as much, or as little, as their underlying assets. So again, no, nobody is buying bitcoin because of its blockchain tech because there are better options available.
Bitcoin is an immaterial dream
Why are prominent people buying bitcoin if it has so many problems? Some bitcoin supporters have the vision of a future where currencies are fully democratized and not controlled by governments. I am not confident that this future will come based on the reasons above.
The massive amount of liquidity in the markets right now, from the monetary and fiscal policies of many governments to combat covid, is an important reason for the rise in the value of bitcoin. This is not sustainable over the long term.
Whatever other advantages that bitcoin might have over fiat money, such as speed of transactions, will be eroded when fiat money becomes fully digital.
Why is bitcoin crashing?
Central banks and governments around the world are becoming increasingly concerned about the risk of the crypto to the environment, financial stability and individual investors’ wallets.
Calls for further regulation are seen as a threat to the decentralisation of crypto, which is impacting price. In mid-May, China suspended operations of major cryptocurrency mining players, with the likes of Ethereum, Dogecoin and Binance Coin also falling sharply in value.
Do you lose money if bitcoin goes down?
You only lose money if you decide to sell bitcoin for less than you bought it for, which is known as “crystallising your losses”. If you leave your money invested when the price of bitcoin is low, you aren’t technically losing any money.
Should I buy bitcoin?
You should make sure you understand why you are investing in something in the first place.
Many people have been tempted to invest in bitcoin for the wrong reason: because they have a fear of missing out. They, therefore, risk buying bitcoin when it is really expensive, making the potential for losing a lot greater.
Has bitcoin’s bubble burst?
When assets rise very quickly in price, typically this makes a crash, or at the very least a correction (when the price falls back down to a more ‘normal’ level) much more likely. That is the situation bitcoin is in right now.
Can I get my money out easily?
Bitcoin and alternative cryptocurrency assets are precious and while a few of them have risen in value by over 1,300% this year, with the value on exchanges being higher than ever it is currently harder for those looking to cash out or create considerably massive purchases while not being watched by the eyes of tax collectors and governments.
Purchase of luxury items may not be all that easy
In social media and forums, one will notice posts written by people after cashing out, saying they bought a luxury automotive, paid off their mortgage, or cleared their student loans with the money they’ve made from the cryptocurrency trade. However, when you look deeper into the conversations of these people making these claims they clearly point out exactly how difficult it is to do without getting third-party payment processors’ eyes on you.
Exchanges such as Bitstamp, Coinbase, Kraken, and others need much verification to revert Bitcoins to fiat or fiat to Bitcoins. Simply because you’re approved, it doesn’t mean you’ll be able to throw BTC worth US$100,000 down an exchange and expect to get the funds sent to your account with no issues at all. The exchange may even cancel you after the sale was made. Your financial institution can also stop you from cashing out massive sums or just freeze your account. People don’t want to talk about this.
Usually, within the Australia and the U.S. and even other regions, deposits and withdrawals worth $5,000-10,000 are monitored for tax evasion and money laundering. If a user would like to exit back to fiat through a web exchange to process $5,000-10,000 worth of cryptocurrency, one must be able to trust all the third parties involved in the execution of the deal. Regulated exchanges would most likely be monitored when trading with the said amount.
Two-way Bitcoin ATMs and LocalBitcoins
One may start considering that they may sell their funds to a two-way BTM, however, most of the two-way bitcoin automatic teller machine machines solely permit users to sell $200-500 per day. At that rate, cashing out $10,000 worth of Bitcoin, you’d have to visit the BTM for 20 days straight and pay a 7 to 10% fee per transaction.
It also takes some time and well-executed trades to gain trust on the peer to peer platform. Should one still choose to try and exchange BTC for cash from Local bitcoin non-registtered traders yourself, you must be fully comfortable with both your surroundings and the deal. Several instances of street traders being robbed or scammed throughout a trade have been recorded.
Some people don’t care and have no problem parting with 33% for capital gains or other taxes that may be involved.
Crypto is now trade not an investment and will stay that way for a long time. The price could and probably will go all over the place but it is unlikely to go far above the recent high and it is extremely unlikely to maintain or beat a level of $40,000-$50,000 if it does. In the short to medium term. BTC won’t make its next significant high until the next halvening— scheduled for 2024—and that will see us in a different world. I think bitcoin will repeat the fallback it suffered in 2017 just as the rise of that bubble has repeated.
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