It was no surprise when people started asking me about Bitcoin. Money is of great interest to a lot of people; mix it with technology and they want to talk about it.
The main question asked is “Should I buy some?”, closely followed by “Is it safe?”, and “Do you think it’s a bubble?”
To answer the last one first: “Of course it’s a bubble you idiot”. I don’t think there’s anyone who believes it isn’t, but greed conquers common sense. And investing in a bubble can be a rational strategy as long as you make sure you take your capital out before it bursts. You could say the same about any form of investment to some extent. The value of shares will rise and fall in the long term, and everyone knows you should spread the risk. Seeing the return for a punt on Bitcoin at the moment persuades some to abandon this golden rule and put all their funds at risk.
As to whether the technology is safe: No way! It’s as safe as the security of the computers it is stored on, and the integrity of those storing it. Good luck with that. Technically, blockchain technology itself looks very secure but that isn’t where the risk lies.
And now we get back to the main question: Should I buy some? Well I wouldn’t, simply because it’s immoral.
Yes folks, if you can see beyond the chance of a fast buck, Bitcoin is sleaze. There are a few fundamental truths about cash it might be worth reiterating.
Back at the dawn of history, humans realised they’d be better off if they traded. If you had a lot of grain but no apples, find someone with apples and no grain who wanted to do a swap. Cash emerged so you could defer a transaction; or enter in to multi-party deals more easily by extracting the value from the item and placing it in to something more convenient (small pieces of soft shiny metal).
A coin’s value depends on whether you can buy what you need with it at a later date. If you exchange your grain for a coin you have to be convinced that the apple dealer will exchange the coin for your apples. Coins are a matter of confidence; confidence that they can be exchanged for something useful later.
If coins were easy to make, people would just make coins and the apple dealer would end up with a load of inedible shiny metal fragments; so there must be a finite supply for cash to work if the cash has representative rather than commodity value. Prisoners have often used cigarettes as they also have commodity value in that you can smoke them. Leaves, on the other hand, are a poor choice of currency as they grow on trees.
With no commodity value, you might ask why Bitcoin works at all? There are effectively a finite number of valid bitcoins, so you can’t make your own. And people have confidence that they can be exchanged for the goods they need at a later date. Perhaps not as much confidence as they do with regulated currencies, but their big advantage is that they are outside the regulatory system, and like cash or cigarettes, are ideal for black market transactions.
The bottom line is that criminals accept Bitcoin for the purchase of drugs, weapons and extortion payments. Like the legitimate world using BACS/CHAPS/CHIPS (electronic Bank payments), organised crime in the 21st Century benefits from a black money clearing system: Bitcoin. Cryptocurrency has a value because it can be used for buying drugs in large quantities across international borders far more conveniently than using the old-school suitcase of dollar bills. No questions asked. If you want to buy narcotics, you need to buy Bitcoin to pay the dealers with.
And if you want to know what I mean by extortion, take a look at Cryptolocker. This nasty piece of malware encrypts the victim’s files until they pay a ransom in, you guessed it, Bitcoin. I can only see this so-called “Ransomware” business model expanding in the future.
Like any currency with a floating exchange rate, the value of a Bitcoin should fluctuate based on the supply and demand for the illegal goods and services it represents. If the demand goes up and supply remains the same, the value of Bitcoin would rise as purchasers out-bid each other to secure enough Bitcoin to pay their dealer. I strongly suspect that knee-jerk (or just jerk) investors are seeing a rise in cost, and not looking too deeply at the tangible commodities backing it. Or perhaps city speculators are not being greedy and stupid; perhaps they really do need Bitcoin to pay for their coke habits.
So, as to whether I think Bitcoin is a good investment, they only answer is: “Yes – it’s can be just as profitable other parts of the drugs trade if you can get it right.”