Cryptocurrency is still a relatively new concept. Although it has been around since 2009, it’s still not that well understood by most people on the street.
Arguably, it’s not even that well understood by the many people who have chosen to invest in it! You could put us in that category when we invested in Bitcoin in mid-2019 – we really didn’t have a clue what we were doing, and even working out how we could actually hold Bitcoin was a challenge.
Like many investors, we leapt into Bitcoin in the hope of making a quick profit. That hasn’t materialised (yet), but we’ve certainly had time to focus on our investment.
In this article, we’re going to share 5 key concerns we’ve got on Bitcoin, and why they might mean that it really isn’t everything that it is cracked up to be. We’re not going to tell you whether to invest in it or not, that’s entirely up to you. But we certainly think you’d want to consider the below before you do.
First, though, let’s remind ourselves what the point of Bitcoin is supposed to be.
Bitcoin wants to be a global currency for a modern world
Bitcoin was developed as a new global currency that sits outside of the normal financial system. The intention was to let people take control of their money, facilitating easier and cheaper transactions whilst not being subject to interference from governments and banks.
The Bitcoin website itself (https://bitcoin.org/en/bitcoin-for-individuals) highlights the key benefits of using its currency:
- Easy payments
- Security and control over your money
- Fast international payments
- Your identity is protected
All of this sounds really good. It’s easy to see why so many people get excited about Bitcoin. This is the logic that sees many people wanting to buy and hold bitcoin. And it’s through these ideas that Bitcoin has gained its value.
But there are several reasons why we should all be cautious of Bitcoin as a new global currency. Here are 5 major concerns:
1. Bitcoin is difficult to hold
There are a number of ways you can hold bitcoin. You can choose to invest in it through an online exchange such as Coinbase. Or you can choose to create a digital wallet to keep it in.
Both of these have issues. If you invest in bitcoin through an exchange, they hold your bitcoin for you, and you’re not going to be using it to make daily payments for things like cups of coffee. You’ve also got to navigate all the fees that come with something like this.
If you set up a digital wallet, you’ve got much more control over your Bitcoin. But setting up a digital wallet isn’t the easiest thing to do if you’re not technically savvy.
You’ve also got to set a password for that digital wallet, and if you ever forget that password, that’s your money gone (like this guy whose hard drive went in the bin containing £210m of bitcoin – BBC article)! There’s no helpdesk, no password reset.
This became a notable problem for one Bitcoin owner who died without leaving a password to his digital wallet which contained £145 million worth of the stuff. What made it even worse was that he was holding £41 million of that stash on behalf of other people, who are now all absolutely livid that their money has gone. (If you want to read more on that story check out this article in the Independent Newspaper).
For all the many flaws of mainstream banks, at least you know where your money is, it’s accessible easily, and you’re protected against its loss by the banks own security and by government regulation. Bitcoin has a long way to go before it feels easily usable.
2. Bitcoin doesn’t earn interest
As we all know, when you deposit money in a bank, you’re able to earn interest on it. Unfortunately the same can’t be said for Bitcoin.
Whether you store it in a currency exchange, or in a digital wallet, nobody gives you extra bitcoins in interest. It is sat there doing nothing. For normal currencies, this is a problem as inflation will slowly erode the purchasing power of your money over time if you don’t put it to some use.
Supporters might argue that, in the case of Bitcoin, this doesn’t really matter as its value would be expected to grow over time in line with inflation.
Except, that’s clearly not the case. When you look at a chart showing the price of Bitcoin, it has no correlation whatsoever to the rate of inflation, which leads us on to the next point….
3. The value of bitcoin is completely unstable
Imagine looking in your normal wallet and seeing that you have a crisp $20 in it. You know what you can buy for that, and you believe that if you still hold that note at the end of next week you’ll be able to buy the same things. You’d even be pretty confident that, in a couple of months, you’d still be able to buy the same things for that amount of money.
Bitcoin is the complete opposite. The price of Bitcoin can swing enormously from one day to the next. Whilst the headlines tend to focus on people who became bitcoin millionaires after exponential growth in its value, we’ve also seen periods where its value has halved – which means that a huge number of people will also have taken substantial losses.
And this is the problem with Bitcoin as a currency – you can’t rely on its value. It’s like opening up your wallet one minute and seeing you’ve got $20, and then next you’ve only got $10. There’s no guarantee that your Bitcoin is going to hold its value in the future. That’s a clear barrier to it being relied on as everyday currency, as opposed to just being a vehicle for speculation.
4. It sits outside of regulation – which has its downsides
One of the selling points of Bitcoin is that it aims to sit outside of the established financial system. Away from the reach of governments and banks.
But I’m not sure if this is quite as much of an advantage as some would have you believe. Having your money held in a mainstream bank is not quite the evil that some suggest it is. At least in a mainstream bank you know where your money is, you can access it easily and it’s protected against theft and loss.
It’s also a flawed idea that Bitcon can completely exist outside of any government control. Governments can easily pass laws that would make it very difficult to use Bitcoin freely and, whilst this might just drive Bitcoin activity underground, that would make it very difficult for mainstream usage.
5. Bitcoin is still perceived as shady and not well understood
Why does Bitcoin want to exist outside of the normal financial system?
It’s not as easy to go through a normal bank if you’re needing to make payment for illegal activities on the dark web. But if Bitcoin is a currency that facilitates this sort of activity, then does it deserve mainstream support?
Whether Bitcoin is used for that activity or not, a section of the public still perceive it as being shady.
Then there’s also the issue of understanding it in the first place. Blockchain? Mining? It’s all a bit complicated for many people to want to get to grips with.
Safe to say Rick probably isn’t ‘all in’ on bitcoin
What is the value of Bitcoin then?
Ultimately, what gives something a value is its usefulness.
When you look at stocks and shares, they entitle you to a share of a company’s income-generating ability.
When you buy a commodity, it can be processed and turned into products that can be consumed. Think of oil being turned into fuel for cars as just one obvious example.
Even the more subjective things like art, which sometimes bafflingly sells for millions, does have some perceived usage for the purchaser.
So, what about bitcoin. What is its value?
As we’ve said above, the value that bitcoin attempts to provide is as a useful and reliable global currency. Ideally, it would be something that people want to have in order to buy and sell ordinary items.
But that core idea currently has several major flaws, which we’ve covered above.
Now, I’m not saying it has ZERO value. Just that – in its current form – it is a huge way off being anything like an established global currency. And these flaws call into question what the real value of bitcoin truly is. It might have swung around in value massively over the last few years, fueled by speculation, but over time its usefulness will determine whether people want to hold it.
For us, there are so many negatives to the Bitcoin experience that, if it ever wants to be a mainstream global currency, it’s under real threat from being replaced with something else. A better currency, which provides many of the benefits that Bitcoin offers, but without some of the obvious flaws isn’t inconceivable.
Personally, we think you’d be mad to place a huge proportion of your savings into Bitcoin if you are in it for the long term. But of course, that’s just our opinion. Only time will tell how Bitcoin will perform.
What’s your view? We’d love to hear it below.