The Bitcoin Phenomenon Part 3

If you have been following this series on bitcoin then you should have a pretty good handle on this cryptocurrency by now. Part one gives a brief history of bitcoin and talks about some of the risks. Part 2 talks about why bitcoin will never be a viable currency. It also covers the limitations it has functioning as a legitimate currency. Read part 1 here. Read part 2 here.

If you have invested in bitcoin and made money then you are fortunate. If you invested in bitcoin when it was at an all-time high then you learned a valuable lesson about investing in assets like this. The truth is you take an enormous risk every time you invest in an asset that is at an all-time high and it is smashing records at an incredible rate. Yet somehow new investors are always drawn to these types of investments. Many of these people are first time investors. Let’s review why the risk is high.

For our example we will look at gold. Gold’s all time high was hit in August of 2011. It was going for $1,917.90 an ounce. It pulled back that same day to $1880.00 an ounce. It’s all time high is officially 1889. 70. Later in that same year gold began to drop. Eventually it bottomed out in 2013 as we saw a drop by 28 percent. By 2014 gold hovered around $1140 to $1180 an ounce.

Many gold experts blamed the fall in price on bitcoin. At the time bitcoin was just starting to become popular. The story is that most people were pulling their money out of gold and buying bitcoin. This hype helped those that sold precious metals for a while. Then these gold merchants began to spread a false narrative of a Global Currency Reset. The more they attacked the dollar, the more sales they got. Now the hype was going to be that the dollar was going to crash any minute. This seemed easy to believe simply because the 2008 meltdown was still fresh on everyone’s mind. Many people were still hurting from those events, but the real truth about gold’s fall in value is much different.

The thing that drove up the price of gold was the fact that the world went through a financial global meltdown in 2008.  This meltdown was produced in large part by government intervention into the housing market, and triple A rated mutual funds acquiring junk CDO’s that represented bad debt. Insecurity in the dollar caused the price of gold to skyrocket dramatically creating a gold bubble. As the dollar recovered the price of gold came back down. By 2014 gold was below the $1200.00 mark. It turns out that 2014 was the best year the dollar had since 2005!

Here we are at the beginning of 2018 and gold is just now at the $1,305.60 as of this writing. If you purchased gold close to its high in 2011, you watched your investment dwindle in value. If you spent over $1,800.00 for an ounce of gold, and many people did, you now had two choices to consider. First you can get out and take a loss, or you can ride it out until the price of gold goes back up.

Even if gold recovers in 2018 and passes it’s all time high your investment was still tied up for over 6 years making you no money at all. Breaking even actually means you lost value when you factor in the rate of inflation. During this time you could have profited from mutual funds or other investments. This is the danger of investing in assets that have gone through historic and drastic price increases.

Bitcoin start out in 2017 trading between $930.00 and $978.00. Throughout the course of the year it rose to almost 20,000.00.  Just a few days later it dropped by 30% percent. That drop alone took billions of dollars away from the total cryptocurrency market capitalization. It was a big market correction. It was responsible for sending bitcoin’s price falling below $11,000.00.  Over the next few days, the price of bitcoin would rally, climbing back beyond $16,000 and higher on other cryptocurrency exchanges worldwide. However, bitcoin’s value has begun falling as it fell to the mid-$13k’s area after opening the day above $15,000 on December 28 2017.

This is extremely volatile, and it represents the classic bubble scenario that many first time investors don’t understand. It you purchased bitcoin close to its all time high then you’re stuck holding on to your investment until it recovers, or you can sell it and take a loss.

When will bitcoin recover? Nobody knows for sure, but typically with these things, you will hear a lot of hype and blame from those responsible for selling bitcoin, and from those holding bitcoin. They may blame other cryptocurrencies, and there might be some truth to that. They may make claims that the dollar crash is emanate. They may even spread some of the same global currency reset nonsense that was used to hype precious metals and foreign currencies from third world nations!

The truth is bitcoin is a bad currency. The currency gets its value from demand. So if demand is high the price is high. If demand drops, the price comes down. Standard currencies like the U.S. dollar has contraction measures in place in case demand drops. This makes these types of currency much more stable. Cryptocurrencies have no contraction measures. When demand drops investors suffer. Demand is also created through the use of taxation. It has been historically proven that when governments tax their people, and then requires them to pay that debt in the government’s currency, it creates demand. Because of the volatility of bitcoin it is not a stable store of value. This is the most basic function of a currency. This was covered in greater detail in part 2 of this series.

Not only is bitcoin an unstable currency, it is also a very unstable investment. It seems that there have been times in the past when the servers were down for days because they could not handle the volume of traffic. This means that if the investment begins to fall rapidly, it will be hard to get out creating an even bigger loss. See the link below

GBL is a Chinese bitcoin trading platform. Many subscribers were unable to log in creating a loss of up to $5 million worth of bitcoin. The server suddenly shut down on October 26, 2013. In September of 2017 China has banned cryptocurrency exchanges. This also caused bitcoin to drop temporarily. The People’s Bank of China ruled that these unregulated sales violated Chinese law and must stop immediately.

Tether is an online company which backs bitcoin cryptocurrency with fiat currency. They were hacked on November 21, 2017. The hacker took $30,950,010 in USTD from their primary wallet.

In February 2014, cryptocurrencies made national headlines because the world’s largest bitcoin exchange was declaring bankruptcy. The company called Mt. Gox stated that it had lost nearly $473 million of their customer’s bitcoins likely due to theft. This amount was approximately 750,000 bitcoins which equals about 7% of all the bitcoins in existence. Because of this crisis the price of a bitcoin fell from a high of about $1,160 in December to under $400 in February.

As of September 2017, there were over 1100 digital currencies in existence. As more of these currencies become popular it will likely pull revenue from those who invest in bitcoin. This action will decrease demand for bitcoin thus driving down prices.

Bitcoin could also recover sooner than expected. Who knows for sure? The main point in all of this is the fact that bitcoin was never a sure thing, and the investment is much more volatile than it seems! This investment is always presented by investors and cryptocurrency markets with great bias.

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