Not a day goes by lately without more news on Bitcoin’s meteoric rise this year. But is it really a good investment? We’ve broken the case for Bitcoin down into pros and cons.
Benefits of Bitcoin
Bitcoin enthusiasts claim all manner of positive effects from the cryptocurrency, from being an “ethical investment”—see below on some of the “ethical” uses people have for Bitcoin—to scarcity, as apparently only 21,000,000 have been created and can ever be created. 1
However, the only truly objective benefit of investing in Bitcoin is if you are hungry for volatility. Bitcoin is proving to be subject to staggering volatility: as of 1:00 pm on December 12, the cryptocurrency was up 189.52 percent over the past month, but if you bought Bitcoin at $17,303.46 on December 7, by December 10, you would have seen the price fall to $14,013.06, a loss of 19 percent in only three days. These highs and lows are common occurrences for Bitcoin—even Bitcoin Magazine admits as much. 2
Drawbacks of Bitcoin
The cons for Bitcoin are many.
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As a rule, anything in the financial system that criminals are in favor of is a bad thing, seeing how criminals only enter the financial system to exploit it, which is apparently what many criminals are doing with Bitcoin, even going so far as to demand kidnapping ransoms in Bitcoin to prevent tracking of the funds. 3
Conceptually, it makes sense that sufficiently strong encryption could prevent hacking of any system, let alone a decentralized currency. Yet, in spite of its vaunted security claims, in November 2017 hackers stole $30 million of the cryptocurrency from Tether, a digital currency start-up.
Last week, Alan Greenspan compared Bitcoin to the Continental currency, an early U.S. currency issued by the Continental Congress that skyrocketed in value from 1775 to 1782 then lost all of its value. 4 Belinda Boa, a senior manager for BlackRock, Inc., the world’s largest asset manager with $5.7 trillion in assets under management, recently said that the financial behemoth sees “bubble-like valuations” in Bitcoin. 5 Ron Paul goes even further, asserting that “cryptocurrencies are in an ‘exponential bubble’…and are ‘a reflection of the disaster of the monetary dollar system.’”
Bitcoin enthusiasts love to point at the cryptocurrency’s lack of popularity within financial circles as a good thing, but at some point, you have to wonder if the Kool-Aid is spiked!
The IRS recently won a lawsuit against Coinbase, one of the largest Bitcoin wallet providers and exchanges, to force Coinbase to release trade data so that tax officials can look for evidence of tax evasion. 6
As mentioned above, a finite number of Bitcoins can ever be mined: 21 million. So far, about 16 and a half million Bitcoins have been mined; however, an estimated 25 percent of these coins have been accidentally lost or willfully destroyed. Bitcoin owners lose their private keys or passwords; experience device failures; forget about their digital wallets; or pass away without leaving their coins to anyone. In the early days of the cryptocurrency, when its value was much lower, some investors deleted the coins they’d mined from their computers or discarded hard drives containing thousands of coins. 7
Gold: The True Safe-Haven Investment
In the short run, Bitcoin may be pulling some investment interest away from precious metals like gold, simply because many investors have only a small amount set aside for alternative investments. Yet in the medium- to long-term, we see the Bitcoin bubble as highly bullish for precious metals. Sooner or later, the bubble will burst, and when it does, precious metals will be there for the flight to quality.
‘This crazy Bitcoin mania has drained off what would otherwise be a demand for gold. … When it collapses, I think a lot of that demand will come back into gold, as well as people fleeing the standard stock and bond markets for the first time in 9 or 10 years.’ –former Reagan White House Budget Director David Stockman.