226-378-7748 joe@budgetboss.ca

Friday, January 12, 2018

Invest in Bitcoin??……. Nope

The world of cryptocurrency has taken the investment community by storm. Everywhere I turn its Bitcoin this or Altcoin that. I have had several people in the know explain to me exactly how Bitcoin works and to be totally honest, I have more questions now than before. I am quite familiar with currency and how it usually works, but Bitcoin seems strange to me. The whole concept of it seems flawed and for that reason, I cannot invest in it. Furthermore, I would never recommend anyone else invest in Bitcoin as well. I have several reasons why I came to this conclusion and in this post, I will outline them. While I will not deny that there are people who have made money off Bitcoin and will make money off Bitcoin, I believe the majority of people who invest a significant amount in the currency will get hurt in the long run.

 

1) It lacks the fundamental understanding of what currency actually is

What is currency anyway? Is it just a piece of paper, or plastic for us in Canada? Why is the $100 bill worth more than the $5 bill? They are both made from the same material and have the same size and weight. Is brown worth more than blue? All currency is in our society, is an agreement. This agreement is what runs our monetary system. It runs our economy and dictates most of our lives. The agreement is that we all can logically conclude that these pieces of currency hold certain worth. We all agree that $100 is worth a value that can be translated into goods and services. Our employers determine the value of our work and pay us money based on that. The cycle continues and is endless. When it comes to Bitcoin, however, there is no agreed upon worth. If I told you I want $700 for a chocolate chip cookie, you would say screw you and move on. So, what is it that makes Bitcoin so valuable? Is it the scarcity of them? If I told you I had only 3 cookies and now I want $1000 for them, would you buy it then? The answer is simply no. Without an agreed upon value by most of society, we will never truly know what any cryptocurrency is actually worth, and that is troubling to me.

 

 

2) It is at the mercy of Governments

My main reason for not liking cryptocurrency is that I truly don’t believe it will fly in the society we live in. As mentioned, currency is simply an agreement between individuals on value. Well, what about state actors? What about America, and what they think their dollar is worth? Much of what currency is worth is based on its valuation against other currencies. The standard for most of our history has been the American dollar. Here in Canada, we value our dollar against the US dollar as a form of stating our dollars worth. If our economy slumps, our dollar is worth a little less American dollars. If their economy is doing well, our dollar, in turn, becomes worth a little less once again and vice-versa. Bringing in a new universal currency devalues traditional currencies. Just think if every in Canada decided tomorrow that they were trading all their money for Bitcoins. The Canadian dollar would collapse and have no value whatsoever. It’s value hinges on the fact that it is used widely. Will Canada, or any other nation for that matter, allow this to occur? The answer is no. It is quite simple to stop a rogue currency, just outlaw it. No purchases can be accepted from providers of goods and services using Bitcoin. That is where I think crypto will fail. I believe governments will not allow it to be used within their borders and it is already happening. South Korea is poised to propose a bill banning all trading of digital currencies. I believe many more nations will follow suit.

Ethereum dives as one of the world’s biggest cryptocurrency markets considers a bill to ban trading – CNBC

Bitcoin

 

3) It is completely speculative

A dangerous form of investing is speculation. What speculation means is that you base your investment decision on mostly guesswork and hunches. There are no actual attributes that made you come to your conclusion to buy, just theory. Sound investing requires the analyzing of a company or currency. Investors, or their money managers, go through a company’s financial records and previous track record to determine if an investment is viable. It takes time to do this type of work and it is taken very seriously. When you buy an investment based on a thought such as: “Bitcoin becoming the new world currency,” you are speculating. Your thoughts are based solely on your opinion and have no real-world evidence to back them up. This is why speculation is so dangerous. Just like investing in a drug company that is waiting on government approval for a new, experimental drug, you are rolling the dice. When you invest in actual companies or currencies based on actual histories of performance, you are making a sound investment. When you invest in something with no track record, that may or may not exist in 1 year, you are speculating.

Breaking Down Speculation – Investopedia

 

 

4) The massive fluctuation proves it’s not a sound investment

It is not usual for currencies to lose 10% of their value in one day. If that happened in Canada, our economy would grind to a halt and a national crisis would be proclaimed. It is also not normal for any investment to fluctuate in 30% swings over the course of a week. When something is based on all speculation, it will change in value frequently and drastically. A simple notice of South Korea proposing a law to ban digital currency made Bitcoin drop dramatically. The fluctuations seen in Bitcoin have been nothing short of ridicules. While an investment that rises quickly is very nice, it also poses the threat of declining just as quick. We have all heard of high risk, high reward. In the investment world, this is a very dangerous game. The speculative nature of Bitcoin makes it attractive to investors looking to jump in, make a quick buck, then jump out. This leaves those looking for long-term investing in a bad position. If an investment is not a viable long-term holding, then it is quite frankly fool’s gold. Many people can get hurt with a situation such as this and we only have to look back to the dot.com bubble of the early 2000’s to see what happens when investments are made based on pure speculation.

Why Bitcoin is Stupid – Mr. Money Moustache

Bitcoin

 

While I do not wish anyone to lose money with their Bitcoin investments, I also cannot stand behind such an investment. Even Warren Buffett says that, “Cryptocurrencies will come to a bad ending.” Buffett states that he doesn’t own any and will never own any. While people may shun his lack of understanding of the crypto world, he has also been right on many things in the past and is the founder of one of the world’s richest companies. I will tend to take his opinion on investing over that of a kid in a basement with a computer.

Thanks for tuning in this week as we conclude 2018 Trends Week at Budget Boss. Tune in next week as I delve into FIRE and show what I think about the financial independence world. If you would like to start an actual investment plan, please do not hesitate to contact me at joe@budgetboss.ca and I would love to chat money with you. Have a great weekend Bosses!

“Speculation is only a word covering the making of money out of the manipulation of prices, instead of supplying goods and services.” – Henry Ford

Bitcoin

Southern Ontario: The Next Silicon Valley?

Email – joe@budgetboss.ca 

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