Woooohooo! Bitcoin is scorching! It’s party time, baby! Par … tay.
Seriously – have you seen the exchange rate? A grand per Bitcoin* – boom! What about John Woo, the star analyst from Bank of America Merrill Lynch – surely you heard his word from on high? It’s pure gold. And I quote: “We believe Bitcoin can become a major means of payment for e-commerce and may emerge as a serious competitor to traditional money transfer providers.”
You either need to be really rich, really idealistic, or really crazy to invest in Bitcoin.
Hear that? “Major means of payment!” Cha-ching! Can you smell the money? Can you taste it? Where’s the yacht? Where’s that Cristal? We’re all gonna be rich! Amiright?
Nope – probably not. And, for the love of Adam Smith, we need to calm the hell down before more people get hurt.
If you’ve been paying attention to Bitcoin – especially if you just started paying attention in the past few months – it may seem as though, without a few Bitcoins in your wallet, you are literally missing out on a virtual gold rush. Trouble is, that’s true – if you bought Bitcoin early this year, when a Bitcoin cost just $13, or in years past, when Bitcoins could be had for pennies. The price, as of this writing: $1,055. (Scratch that – see update below.)
Combine the ballistic missile rise of Bitcoin’s value and the minting of hundreds of unlikely millionaires with an increased interest in the digital currency among governments and major financial institutions and a broadening awareness overall, and we’re now left with a level of insanity that makes Charles Manson look like a well-balanced individual.
Bitcoin’s rabid fans will label me a traitor for saying this, but the fact of the matter is: You either need to be really rich, really idealistic, or really crazy to invest in Bitcoin.
In case you’re just hearing about this Bitcoin thing today (welcome to the Internet!), here’s a primer: Bitcoin is a completely digital currency created by a “person” known as Satoshi Nakamoto – who, in all likelihood, doesn’t actually exist. Bitcoin is not controlled by any central bank or other entity. Bitcoins transactions are more or less anonymous – like cash, but on the Internet. The fees for transferring Bitcoins from one so-called “wallet” to another are extremely low compared to transferring dollars through a bank.
Got all that? No? Doesn’t matter – you shouldn’t be toying with Bitcoin unless you have money to burn.
Right now, Bitcoin is completely self-regulated. There’s a whole complicated system in place to keep the currency on the level. Problem is, that’s where the oversight stops. As The New York Times reported on Friday, the reason financial regulators haven’t put their stamp on Bitcoin yet is because “government authorities do not agree on which laws apply to Bitcoin — or even on what Bitcoin is.”
That’s right – governments can’t even decide what Bitcoin is. That fact alone should send any responsible investor running for a bunker. (High-risk investors, however, likely see the lack of government intervention as Bitcoin’s most valuable feature.)
What the Bitcoin free-for-all means in practice is that your Bitcoin stash is roughly as protected as a nudist beekeeper. Unlike your bank account, the federal government offers no guarantees that your Bitcoin wallet is safe. And if someone steals your Bitcoins, the police are probably not going to do a damn thing about it. Again, as the Times reports, “…for crimes contained within the Bitcoin network – like thefts from apparently reputable online wallets where Bitcoins are stored – there has been almost no accountability.”
OK, so what we need here is a little government oversight, and the problem will be solved, right? Wrong again! First of all, people who are into Bitcoin like it because the government isn’t involved. It’s stateless, dude. It’s totally free from The Man. And the second Uncle Sam comes in to make sure the youngster currency is playing by the rules, party’s over – many people will cash out, sending the price into a free fall.
“The developers of Bitcoin are trying to show that money can be successfully privatized,” writes Edward Hadas, economics editor for Reuters Breakingviews, for NYTimes.com. “They will fail, because money that is not issued by governments is always doomed to failure. Money is inevitably a tool of the state.”
In short, all it will take for the price of Bitcoin to collapse is a hint of regulation. The second that happens – and it will almost certainly happen eventually – Bitcoin will likely crap itself and die. That is, if the government doesn’t murder it first.
Some A-hole hacker could swipe your entire Bitcoin fortune, and walk away without a care in the world.
As for using Bitcoin as actual money, that’s a bad idea too. First of all, it just isn’t practical. You can buy all types of stuff using Bitcoin, but unless you want to buy something illegal, there isn’t a need to use Bitcoin at all. It’s just a novelty. But it’s worse than that. Because the price of Bitcoin changes by the day – often drastically – you could end up paying far more for that car than you would have using dollars.
At the end of the day, Bitcoin is a technologically and philosophically excellent idea – one that people are willing to pay real money to have a part in. It’s cool. It’s irreverent. And it is making some people very, very rich.
The price of a Bitcoin is at an all-time high right now – and it could quite possibly jump ten or a hundred times higher, making this anti-Bitcoin screed seem ridiculous. Even if that happens, however, I won’t feel an ounce of regret for recommending that everyday people keep their life savings out of Bitcoin; its value could just as easily – perhaps more easily – drop to $100, or $1, or lower. And even if it doesn’t, some A-hole hacker could swipe your entire Bitcoin fortune and walk away without a care in the world.
There may come a day when plunking your dollars into Bitcoin makes sense. But now is not that time.
*Update: In the hours since this piece was written, the Bitcoin exchange rate has tumbled to ~
$760 below $700 ~$825 (hurray!)– only further bolstering my point. (last update: 10:35pm ET, 12.8.13)
Update 2: Some of you have made some excellent points, which I took to heart, and dug into further here.
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