My husband Chris, who is a software developer by day, mines (or creates) cryptocurrency (and builds machines that do that in his sleep) during some of his free time. He’s been doing this since the Summer and has been able to make thousands of dollars all just by mining–he hasn’t invested a cent in these cryptocurrencies.
As such, I consider him my go-to when it comes to cryptocurrency (among other subjects), of course.
A few days ago, we were chatting about the latest Bitcoin craze (it recently climbed in “value” a few thousand dollars in just a few days) and he had so many interesting things to share, that I asked if I could record our conversation and he was happy to participate.
What follows is a transcript of our talk. (Well, it was mostly him talking.)
His main points are that those who invest in something they don’t understand or fully know about are bound to get burned like moths to a flame, and unfortunately and for many reasons, Bitcoin doesn’t meet the conditions to be a good investment.
Read this and you’ll be beyond informed and armed with real facts at your work or family Christmas party that’s bound to be full of uninformed Bitcoin fans.
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There are a few problems with Bitcoin.
Let’s start with the major one, and it’s the transaction times:
It takes Bitcoin a VERY long time to complete a transaction–longer than any other cryptocurrency–hours, actually.
For example, I’m on Newegg.com. I decided I want to buy a processor, so I put it in my Basket, and I go to Checkout. I want to use Bitcoin. I then give Newegg 1/2 Bitcoin for the processor.
What will happen next is that the network will have to validate or confirm the transaction–all before Newegg even sees payment and can use it. That can take an hour, two, even four hours.
Worst-case-scenario, let’s say it takes Newegg four hours to get that payment of 1/2 Bitcoin. They’re still getting 1/2 Bitcoin, but Bitcoin has been fluctuating all along, so that at the end, they could lose money because the value of Bitcoin went down. In other words, Newegg will have sold that processor for much less than it advertised, and all because of the long processing times.
[Imagine going to Walmart, standing at Checkout, getting ready to pay $20, only to have the associate say you’ll have to fork over more money because the dollar lost value that quickly.]
Bitcoin has tried to fix the long transaction times a few times, but hasn’t been able to (due to network congestion and other things). Because of these long transaction times, vendors have actually stopped taking Bitcoin.
Then there’s merchant acceptance (or lack thereof)
When you see merchants deciding that it’s no longer in their best interests to take Bitcoin, its usability and acceptance goes down, and I’d expect to see it drop in price right after.
[Indeed, this past weekend, after seeing it climb in price a few thousand dollars, we saw it drop in price a few thousand dollars again.]
Its long transaction times and decreasing number of merchants that accept it are major problems.
However, it’s going up because there’s demand for it: Even though merchants aren’t accepting it as widely as they used to, people are still buying and selling it on these cryptocurrency exchanges.
The current problem with cryptocurrency exchanges (such as Coinbase, Kraken, Cryptopia, etc.)
There are also problems with these cryptocurrency markets despite their wide use.
People can lose a LOT of money, and it’s mainly because during peaks like the one from this week, sometimes the systems can’t handle all these transactions and they time out, disabling people from completing these transactions, and making them potentially lose a lot of money.
That’s not that big of a deal with other currencies whose perceived value isn’t as grand (or overly inflated) as Bitcoin’s. I once lost a couple dollars when I ran into a timeout while trying to sell some Zcash that I had mined.
But if you have a timeout with Bitcoin on these markets where you’re trying to sell, someone could very well lose $1,000 USD or more in a couple minutes.
And to make matters worse, sometimes people launch a Denial-of-Service (DoS) attack while this is going on to keep people from logging in! These attackers may have code using these exchanges’ (e.g., Coinbase, Kraken, etc.) API written to sell. These people could stand to gain a lot of money.
So then you can have these people with a LOT of Bitcoin inadvertently sell it all, which can manipulate the market and lead Bitcoin’s price to tank.
Sure, some people have sell orders for when something like Bitcoin drops below a certain amount. In fact, with their DoS attack, these attackers probably triggered a lot of sell orders.
At the same time, they may have also triggered a lot of buy orders, and this has happened with Ethereum [another cryptocurrency] on other markets: Someone was able to manipulate the market by selling a million Ethereum. This caused its price to plummet to just a few dollars. A LOT of people lost a LOT of money.
On Wall Street and other markets like it, there are protections in place for when something like this happens. For instance, they halt ALL trading.
Not so with cryptocurrency markets, of which there are hundreds (if not more).
These markets don’t have those protections or regulations in place, meaning you could be playing with fire if you don’t know what you’re doing.
That’s one reason why investing in this is a bad idea if you’re using cash.
A better idea would be to figure out how to mine it, and if you do lose all/most of your money, you have the mining hardware, with which you can figure out another cryptocurrency to mine. You’d still have your assets.
[Or, you could have also done what one of Chris’s friends did: He put in $400 back in the day, made that money back, and then promptly quit, so to speak. Now, since he no longer has any skin in the game and nothing to lose, he’s merely riding out the wave and going with the flow. If Bitcoin goes up, great. If it goes down, that’s great for him, too, because he already recouped his original investment.]
[Anyways, to recap: If you mine the cryptocurrency and lose money, you still have that hardware to continue to mine other cryptocurrencies.}
But Bitcoin, an intangible asset that you can’t see or touch or do much of anything with, is just there, in cyberspace, and your $1000, $10,000, $20,000 you used to buy Bitcoin could drop to, say half, and you’ve lost, well, half your value.
What are you going to do at that point? Hang on to it or sell it?
You could ride it out and you may get some of it back, or you could continue to lose.
Me: So why isn’t now a good time to invest in Bitcoin?
It goes back to a couple of factors.
Transaction time issues
First, Bitcoin did yet another “fork” (it’s third, I think) but hasn’t fixed its transaction timing problems yet.
[A “fork,” in this case, is like an iteration. Similar to a fork in the road, this “fork” he’s referring to is like a deviation/split from the original. A group of developers split from the original to implement their solution, resulting in another fork. Bitcoin is on its third.]
Transactions still take an unusually long amount of time, so people can make or lose a lot of money in an hour.
There were a lot more merchants accepting it before, but because it takes a while to transact, merchants are afraid to lose money, and merchant acceptance has gone down.
Third, there’s privacy.
[Here’s also a short overview of the cryptocurrencies that are better than Bitcoin at privacy and timing.)
Bitcoin, I think, was originally conceived as a currency that could be used on the internet that could be somewhat private.
It isn’t! If you do enough digging, you could figure out who originated the transaction, to whom it was sent, AND how much went through. It’s not private at all.
Fortunately, other cryptocurrencies have also tried solved their privacy issues. For instance, Minero, Dash, Zcash, all have tried to solve them in their own way, but no one really completely has been able to.
But one cryptocurrency did solve it, and it’s called Zencash, via secure nodes that encrypt everything on the network from point A to B, hiding everything from who sent it, to who received it, and how much was sent. It is truly private.
Moreover, Zencash is much quicker–transactions take about 2.5 minutes and under to confirm.
Ethereum takes 30 seconds and Ripple takes a few seconds. In fact, Ripple is being looked at for use in banking transactions by entities like JP Morgan and other big banks that would like to implement something like this in an enterprise-type of solution.
Speaking of Ethereum, JP Morgan is also looking to implement an Ethereum network and is even exploring Zcash’s technology to integrate it into this network.
Ethereum might also begin to overtake Bitcoin because it’s faster, so merchants could begin to accept it over Bitcoin.
If that happens, Bitcoin would probably still remain out there, but its value will tank.
When was a good time to invest in Bitcoin, then?
Bitcoin is not a good thing to invest in now because people are getting involved with it after they hear it in the news. “Oh it’s at $20,000! I gotta get some of that; I’ll invest!”
That’s not the time to invest.
The time to have gotten involved with it was when its price was $1000 or $500–not now.
The reason it’s at this price is because everyone sees it on the news and they erroneously think they have to get a piece of this action.
The people who invested in it one of five years ago, or even six months ago, are the ones who’ll make money because they’ve sat on it and its demand is only growing.
However, if people can’t use it (because of merchant acceptance, privacy, etc.), it’s really worthless.
Plus, because there’s almost no regulation of these cryptocurrency markets, even though people are going to do futures in it, those from Wall Street (if this were Wall Street and WS were providing these futures) would have to be there 24/7.
These markets don’t take breaks
So another issue is the fact that the cryptocurrency markets (e.g., Kraken, Coinbase, Cryptopia) NEVER shut down. They’re up and running 24/7. They don’t take a day off–not even on the holidays. Anyone can get access to it anytime.
Unlike the stock market, which can halt trading if something catastrophic causes a significant number of investors to lose a lot of money, these cryptocurrency markets don’t do that.
This means users have to watch the markets and their accounts like hawks, because you can lose your money in a manner of minutes since others can easily manipulate the market, which has been done.
(E.g., I think Kraken removed stop losses because of one such incident in which, I believe, a lot of people sold Ethereum, and the market reacted and thought there was a problem, tanking its price, and triggering stop losses. Then buy orders were triggered and those who sold now lose a lot of money because of this devaluation.)
BUT even if there was a Wall Street banker looking over these cryptocurrencies 24/7, you’d still have to find a way to get through to them and tell them when to sell. And even after this has been set up, when it’s time to sell, you could be minutes too late.
I got 99 problems but regulations ain’t one
After incidents like this happen, there could be cries for help (in the form of regulations) from irresponsible investors who didn’t know the risks of what they were getting into.
If fools want to invest in Bitcoin, let ’em. Let ’em lose all their money. But don’t baby them afterwards.
If you baby them and add regulations because they were stupid, it hurts it for everyone else who’s got it good and is being responsible.
The government is already creating regulations, but these are more geared to prevent money laundering. These markets are abiding by these new rules because they want to be seen as being in compliance.
You’ve heard me mention Ripple before: Ripple got hit with a huge fine once. Ripple Labs (the maker of Ripple) apparently wasn’t complying with anti-money laundering acts and money transmission laws. (RL is considered a money transmitter because of what they were doing.)
The government slapped Ripple with a several-million-dollar fine, Ripple complied (or tried to), and the fine got decreased to about under a million. The reason Ripple decided to comply with the law was mainly because it wants its currency to be seen as valid and for it to be accepted.
Cryptocurrencies’ adherence to these kinds of regulations help them gain acceptance and validity, and certain regulations could be good for them, but when irresponsible people lose all their money, it can make it very bad for everyone.
There are plenty of stupid individuals who’ll invest in this, not knowing what they’re investing in. They don’t know the risk; they don’t even understand the technology.
They think they’re playing around with something like the stock market–they’re not!
It’s basically, the “Wild, Wild West” because there are no regulations regarding things like, trading times, trading volumes, market manipulations, among other aspects. NONE of those protections that exist in the stock market exist in the cryptocurrency market.
Most people probably think their cryptocurrency app is like a Fidelity or Edward Jones, where they have protections. But they don’t.
They also don’t get that these markets are 24/7–not made for casual investors who don’t watch them and just think they’re good.
Futures are coming in 2018. You might be better off trading with futures on a big bank’s website rather than elsewhere. That way, if there’s a DoS attack, you can still log on to your bank, sell your cryptocurrency, and get your money out quickly. But even then, that’s risky, because of (Bitcoin’s) long transaction times. However, God forbid there’s a DoS attack on the Bitcoin network–that’ll still lead to great losses.
Even fools get lucky. But the problem with this is that if fools continue to get lucky, they eventually start to up their game every time until they lose quite a bit.
I’d never invest thousands (or even hundreds) in Bitcoin–especially at this point.
Years ago it’d have been a smart move.
But now, due to its problems (again, slow transaction times, no privacy, a decreasing amount of merchants accepting it, plus there being better alternatives out there), it’s significantly overvalued.
The only reason it’s worth that much is because it was the first, and there’s a lot of hype at this point.
Bitcoin may fall, and if it does, it may take every other cryptocurrency with it, too. Or not. Actually, with Ethereum out there being so successful, Bitcoin may become obsolete, worthless. Other ones may follow suit and become successful as well–depending on public perception after Bitcoin fails.
I really hope that those investing in Bitcoin wise up and realize that they’re not the ones making money–the miners and others who speculated on it years ago are the ones making money now.
Now people are investing and trying to hold, but they’ll likely lose their money if they don’t start pulling out. I don’t know what’s going to happen, but I have a hard time seeing it top $20K and staying there without it going back down. It’s just not that valuable.
[Sure enough, during the two days since our chat, it decreased again by at least $5,000.]
Frankly, Ethereum is more valuable, mainly because if its faster transaction times, although it’s also not very private, either.
Unless they fix Bitcoin’s problems, it will fail. But the other cryptocurrencies need a disclaimer, too.
It may continue to rise, but it will plummet spectacularly. The other cryptocurrencies that actually solve Bitcoin’s problems (and/or are tied to an enterprise-type of use, such as in banks–for instance, Ripple and Ethereum) do have a chance of staying afloat.
It’s not advisable to invest in these intangible cryptocurrencies until they’re proven, until they’re being used successfully in enterprise settings. JP Morgan and other banks are working on Ripple and Ethereum, and I think there’s a future there. You could invest in that, and it could probably continue to hold its value and even rise.
I may invest in Ethereum later on because of that, but not right now. I’m worried about what Bitcoin may do to other cryptocurrencies if-when it fails. And for the life of me, I can’t find a good use for Bitcoin now that more merchants have stopped accepting it.
Zencash has a great community behind it developing it, total encryption to keep transactions private, AND secure nodes built to provide security to the actual network. It’s something that NO other cryptocurrency has, which is a good thing. I think that’ll have a future for enterprise use as well. Banks would want to have these transactions and not have people see it on the general ledger (where all transactions are registered).
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I hope you were able to gee some key takeaways from our conversation that’ll help you to not only be smart in today’s economy, but also inform your potentially less educated acquaintances and relatives.
If they’re far away or you won’t see them for a while, feel free to share this post with them instead! Let’s spread this like wildfire!
Who knows, perhaps once more people have become more knowledgeable about Bitcoin’s faults, its value may fall, its developers will actually fix it, merchant acceptance will increase, its value will rise again, and all will be good with the world.
But until its issues continue, forget it.
PS- If you have any questions for Chris, drop them in the comments.
PS 2- Some countries treat these cryptocurrencies like actual currency. The United States, however, considers it earnings as if from stocks. So get your docs ready for taxes!