If you are considering “investing” in crypto currencies, or if you already have some, please read this post. And make a wise choice.
I know crypto currencies are not easy to understand, and investment economics are even less. However, there are very simple facts that you should consider.
They may save the planet by the way… not just your money.
1. This is not an investment
Let’s face it: people buy crypto currencies not because they want to use them, but to gain money by buying low and selling high. This is not called “investing”: investing is when you have a fair understanding of what drives the asset up or down, and the asset has some intrinsic value or produces wealth by creating added value. When you have no idea, and you are just taking a bet, that’s called speculating.
2. Current crypto currencies are flawed
The Bitcoin, Ethereum and other current crypto currencies are based on something called “proof of work”: basically, you make it so much resource intensive to make a transaction that it would be uneconomical to make a fake one (it would cost more than it would create money).
As BitcoinWiki puts it:
An attacker that wants to rewrite history will need to do the required proof of work before it will be accepted. And as long as honest miners have more computing power, they can always outpace an attacker.
Hence, the more you use a crypto currency, the more it consumes energy (for computation). This means that a crypto currency decays! This is more and more difficult to make a transaction.
In turn, this property means that this money is deflationary. An economy based on a single deflationary currency would simply get stalled: it would be better to wait tomorrow to spend money, because tomorrow the money will be worth more. No more circulation of money: no more growth, no more exchange. We would probably need to roll-over the crypto currencies, destroying one to make place for the next.
We might have better in the future, but current crypto currencies are not sustainable yet. And we simply do not know how an economy based on crypto currencies would actually work.
3. Crypto currencies have a deceiving name
If you want to understand the “asset” that is closest to a crypto currency, you should not compare it to a currency like the USD, EUR or CHF. If you have read the point above, you see why. On top of that, they are not guaranteed by a state, or by the economical power of a population (taxes). Oh, and by the way, they are not really used as a way of exchanging wealth (only 0.1% of e-commerce transactions, not even 0.1% of electronic transactions yet…).
I believe that you should compare it to buying a software: say you buy the right to sell “EasyWriter 10”. If the software is largely adopted (like Bitcoin is currently), its value will spike. But then comes “EasyWriter 11”, and you don’t own that. Indeed, “EasyWriter 11” is the equivalent of a branch of a crypto currency, like Bitcoin Cash, Ethereum VS Ethereum classic… As a result, “EasyWriter 10” lose much of its value, quite abruptly.
4. Bitcoin is destroying our planet
As explained above, in order to use a crypto currency, you need to spend huge amounts of electricity. Many different estimates are out there, but something like 0.1-0.3% of the world electricity (the equivalent of the energy consumption of Bulgaria or Denmark) is used for bitcoin only. And there are so many other crypto currencies…
Most bitcoin mining activities are pursued in China, where fossil fuels are used to generate electricity.
There are foreseen technologies to lower this power consumption, like proof-of-stake or proof-of-space. But what happens to the “old” crypto currencies when these better crypto currencies are adopted?
5. If you must, there are better ways to speculate
I am strongly against speculating: making a bet and receiving money for doing nothing but being lucky should not be rewarded. But let’s face it: it is tempting. Just don’t forget: that’s not the guy playing in the casino that has a reliable way to make money, that’s the casino owner…
Now, if you still feel compelled to speculate: there are better ways to do it. You can do it by buying CFDs for instance: you can have all the big swings that you have with crypto currencies, without destroying the planet… For instance, you could buy a CFD on gold, which has less volatility (swings in price), and multiply it by the leverage of the contract. A growth of 1% in gold can translate in a growth of 20% in your position, given a leverage of 1:20, not uncommon.
Just don’t do CFDs on bitcoin and crypto currencies… you have a better shot at guessing the evolution of a well known asset class like precious metals, an index or shares of companies…
In any case, don’t forget some basic investment good sense:
- if you are not sure, find a trustworthy person to advise you, that actually earns its own money by investing
- don’t forget that most financial advisers and fund managers earn money whether they grow or lose your money (casino owners)
- quick gains = more risk
- start small and learn. Learning costs money
- read advice from people skilled in investment and finance: you are on a tech blog, quite a bad start 🙂
Anyway, whatever you choose to do, don’t forget that we need air to breathe. Nobody needs bitcoins to survive.
I’m not against crypto currencies, and I firmly believe they have a great future. But they are not ready for mainstream adoption yet, and should not be used as an investment vehicle.
Don’t mind the title of the article: you should go on and buy a cheap crypto currency, but a small amount, in order to learn how it works. This is the future of transactions. But now that you read the article, you get the point: don’t speculate, and don’t bet the farm on it.
Whether Bitcoin rise of fall, there are better ways to bet. Oh, and Bob can’t beat robots when the time to sell quickly will come.
Please let me know if you disagree, or have better information on the topic: an open discussion is welcome.