Earlier this year, a friend wrote to me asking for my opinion on Bitcoin. Despite having some meteoric rises in price in 2017, I have been – and still am – firmly against putting money into bitcoin, or any other ICO. Early 2018 has already seen a massive market correction in the price of the fledgling currency (which I imagine came as a huge surprise to people who piled in towards the end of last year).
What is Bitcoin?
Bitcoin is a relatively new form of digital currency. Unlike standard currencies which are controlled by governments and central banks, Bitcoin uses a special type of decentralised encrypton technology to operate independently of regular institutions.
An individual can earn this currency by getting their computer to calculate complex mathematical problems – a process called mining. Although originally a niche technology, the currency has become increasingly popular in recent years as the price spiked from just a few hundred dollars to more than $20,000 per coin.
Although the first major ’digital currency’ that hit the market, savvy entrepreneurs (or fraudsters, depending on your point of view) were quick to spot an opportunity to get people’s hard earned cash, and today, there are more than 1,000 different digital currencies that are traded on exchanges.
My Thoughts
Whilst volatility can be a good thing for traders and speculators, it can also be hugely problematic for those of us that are into long-term investing. Investing in any asset comes with inherent risk – none of us can see the future – but to me, the bitcoin craze just seems like wild speculation.
When you add in the rise in fraud associated with the currency, the whole thing seems to be about as good an investment as walking into a casino and putting all your money on red. (One report I read over Christmas quoted cryptocurrency losses of over $300m from phising, fraud and theft in 2017. If I can dig it out, I’ll post a link here).
Personally, I think the whole thing is going to end with a lot of unhappy people who thought they were investing in a sure thing, but end up with very little. This is a hugely unregulated sector (part of the draw for some people, but it also leaves the average investor open to getting totally ruined) and holds serious risk for anyone considering putting their money in.
A great example of this is the digital currency called Tether, which launched on the premise of being ’100% back by traditional currencies’. For an investor like myself, this was potentially quite an attraction – something of real value behind the currency!
The company went through an audit over Christmas and the results, well, let’s just say they’re not exactly a clean bill of health. In fact, more can be determined from what the auditor has refused to say than what they’ve actually said.
To cut a long story short, the auditor – a firm called Friedman LLP – dissolved their relationship with Tether due to the ’excrutiatingly detailed procedures Friedman was undertaking’…what, like doing an audit?!?!?
In a preliminary report released last September, Friendman acknowledged that Tether has $442.9 million of cash on reserve, fully matching the issuance of the currency. Sounds great, right? But why, then, have they removed any mention of the company from their website? Doesn’t sound entirely kosher to me!
Conclusion
Ultimately, my advice to my friend was simple – if you don’t care what happens to your money, but it in Bitcoin – treat it like putting a tenner on the horses at the weekend; if you win something, great, if not, well, it was only a tenner.
If, on the other hand, you’re after building a serious portfolio of income-producing assets, then avoid bitcoin like the plague.