With the enormous rise of bitcoin, it’s inevitable that the lamestream media will come out with their hit-pieces and biased objections. A prime example is International Business Times‘ recently-launched article, “Why Investing In Bitcoin May Not Be The Best Idea.”
Right from the get-go, this is a remarkably bad statement. Bitcoin jumped 174% on a year-to-date basis, while the benchmark Dow Jones Industrial Average has only mustered a comparatively pedestrian 8.6%. And don’t give me the “fear of a bubble” nonsense. Volume and integration is only increasing for bitcoin and the cryptocurrency markets, while there’s been a mass exodus from the traditional “paper” markets.
Even as bitcoin hits record-breaking price targets one after the other, Japan has officially declared the cryptocurrency as legitimate legal tender. Other nations, including India and Russia, will soon follow suit. I’m sure that government agencies have an army of financial analysts to manage their decisions — if bitcoin was a disastrous experiment, I doubt it would have so many large and diverse backers.
The author of the IBT piece, Sean Williams, laid out four reasons why he’s keeping his “distance from bitcoin — and all cryptocurrencies, for that matter — and would suggest you do the same ” In turn, I will offer my counterargument.
1. Its anonymity is its own worst enemy
“Without beating around the bush, one of the greatest allures of bitcoin is that it’s not backed by a government, and it allows its users to remain somewhat anonymous, even though their transactions are stored within blockchains. This “investor inconspicuousness” is a big reason why bitcoin has done as well as it has over the past couple of years.
However, this anonymity can also support fraud and other crimes. WannaCry is just one example of what happens when the cryptocurrency falls into the wrong hands. If global governments discover that criminals or terrorists are using bitcoin to fund their activities — and at present there are very few checks and balances in place to weed out this sort of behavior — it could prompt a crackdown. If governments around the world instituted regulations that made it difficult to own bitcoin, we could see prices plunge.
Likewise, added government involvement would reduce the prized invisibility that bitcoin holders love so much, which could just as well create an exodus out of bitcoin, hurting its value.”
My Response: For governments to crackdown on bitcoin, they would require a crackdown on the internet and basic property rights. The Chinese could get away with it, but not the U.S. and western, rational societies. Indeed, government crackdowns are exactly the kind of argument that the mainstream media criticizes the gold and silver bugs for using. Well, you can’t have it both ways!
2. Security is a major concern
Another major problem with bitcoin is that its current and future security are causes for concern. One type of security concern was described above: the potential for an attack on the actual networks that handle bitcoin. But there’s considerably more to worry about than just cyberattacks.
For example, a 2015 Forbes article describes the problem of ensuring that bitcoin’s networks don’t become centralized, which would make bitcoin more vulnerable to a cyberattack and/or fraudulent activity. The network is currently decentralized because it’s run by numerous miners (the people and businesses that run the computers and maintain the system behind bitcoin). These miners are currently paid by block rewards and transaction fees. However, block rewards account for practically all of their revenue for the time being. Over time, these block rewards will decrease in value, meaning that if transaction fees don’t increase, the miners could stop profiting, and bow out. Doing so could centralize bitcoin, since there would be fewer miners, and make it more vulnerable to attack.
Additionally, a centralized network could allow one bad apple, or a small group of bad apples, who control a large percentage of bitcoin to disrupt the market.
My Response: For starters, my friend and Steemit user @mikeparker reported that bitcoin transactions fees have already increased, and quite dramatically! As far as security, this is a flaw inherent in every financial system. Are we forgetting the cyberattacks resulting in flash crashes for the major indices, as well as individual blue-chip names like United Continental? Cybersecurity is a must, but again, that applies to everything connected to the internet!
3. There aren’t any reasonable ways to invest in bitcoin
The third issue I have with bitcoin is there aren’t any reasonable “safe” ways to invest. Choose to invest on a no-name exchange, and you risk losing your shirt to low liquidity or hackers.
Back in 2014, Mt. Gox, a Japan-based exchange that was handling about 70% of all bitcoin transactions at the time, filed for bankruptcy. In its February 2014 bankruptcy filing, Mt. Gox listed 850,000 bitcoins that had been hacked, worth about $450 million at the time, and said it had also lost the $27 million in cash it purportedly had in its coffers.
Another option that’s perhaps slightly more liquid than an off-name exchange is the Bitcoin Investment Trust (NASDAQOTH:GBTC), an ETF operated by Grayscale Investments that owns 173,594 bitcoins, according to its shares outstanding and bitcoin-per-share conversion information on its website. However, based on bitcoin’s closing price on Monday, June 12, and Bitcoin Investment Trust’s market cap of $661 million, there’s nearly a 50% premium on this ETF compared to what the bitcoin it owns is actually worth. And as icing on the cake, management charges an audaciously high 2% expense ratio.
Thanks, but no thanks.
My Response: I just don’t get this argument because frankly, it’s a lazy one. Who made Mr. Williams, or anyone, the arbiter of deciding what is “reasonable?” Before he throws out these terms, it would help to define what he means by reasonable. Because he refuses to, this is nothing more than your classic fear-mongering. Plenty of reputable, heavily-backed and insured bitcoin repositories and accounts exist.
4. Most people don’t understand it
Finally, and perhaps most importantly, a lot of people really have no clue what bitcoin is. I know what you might be thinking: “Great, I can get in ahead of everyone else!” But a misunderstanding about bitcoin, or a complete lack of understanding, could actually yield terrible consequences.
Want an example? How about heightened volatility like we’re witnessing now, or perhaps back in 2013-2014 in the bitcoin marketplace? People might get the broader-stroke concept that bitcoin is a cryptocurrency, but they don’t understand the bigger picture of how it’s challenging monetary theory, or that bitcoin proponents are looking at new ways to secure data and currency transmission. If investors don’t understand these concepts or the risks involved, we could see another Tulipmania-type collapse.
Simply put, at this point, the risks far, far outweigh the rewards.