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Top Bitcoin (Crypto) Questions Answered
Imhotep (Wisdom to You) G&G Readers,
Given the sudden fascination with bitcoin
and other cryptocurrencies, I’m sharing some must-read information to try and
provide some insight to some of the most common myths out their
about Bitcoin and the new cryptocurrency market. I hope you enjoy it and it’s
helpful to you in your journey of deciding if you ‘should’ or ‘should not’
invest in Bitcoin and any other cryptocurrency.
The world of bitcoin is plagued by silly – and pernicious – rumors and misinformation.
These mistruths can cost
you money... in the form of big opportunity cost. The truth is, a lot of what you read about
bitcoin and cryptocurrencies is simply wrong. I have seen articles in the likes
of the Wall Street Journal that are factually incorrect. And now that
the bitcoin price has soared, the media seems determined to "warn"
investors about the dangers of bitcoin.
So … let me break down
the top 5 myth’s I’ve come across in my research.
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? No. 1: Bitcoin is not real money...
The fundamental
characteristics an asset must have to be considered money are:
Uniformity: In other words, every "dollar" or
bitcoin is the same as the next one. When you're talking about using seashells
or cows as currency, uniformity is hard to achieve.
Divisibility: Dollars and bitcoin need to be divisible,
broken up into small increments to cover a wide range of value transactions.
Cows? Not so much, unless you're hosting a barbecue.
Portability: Your currency must be easy to transfer and
store.
Durability: Older, agriculturally-based forms of money had
a shelf life. Gold is the ultimate when it comes to durability. Paper notes
deteriorate.
Limited supply: A currency is worthless if there's no scarcity
to it. Example, there is a $500 million note issued by the Zimbabwean
government – it's a simple reminder of what ultimately happens when governments
try to endlessly print their way to prosperity.
Acceptability: To be considered money, the asset has to be widely accepted. People all over the world will
take U.S. dollars. They won't, however, take Turkish lira.
Bitcoin holds all of these
characteristics with the exception of acceptability – although that is rapidly changing. Japan
passed a law earlier this year that made bitcoin acceptable as legal tender.
And the digital element
of bitcoin? Well, more than 90% of all money that exists today around the world
is not even physical. It's purely digital, existing only on computer servers.
? No. 2: Bitcoin can be hacked...
In certain circles,
bitcoin and cryptocurrencies in general are synonymous with hacking – thanks to
some high-profile hacks of cryptocurrency exchanges, like Mt. Gox in 2014 or
Bithumb in 2017.
In an area so nascent,
of course there are hackers looking to exploit individuals' inexperience or
find technological loopholes. Hackers have always and will always be a risk to
ANYTHING where value resides on a computer network.
But bitcoin is one of
the most secure assets an individual can own – it's just that it's 100% up
to the individual to secure it themselves.
Cryptocurrency exchanges have been hacked. They
are third-party platforms where you have no visibility as to how customers'
digital assets are being secured. That's why if you plan on investing in
bitcoin or any other cryptocurrencies you shouldn't
keep large amounts of them on an exchange... because when it's on an exchange,
you don't own it – the exchange does.
And when it comes to
hacking, you are far, far more at risk from other cybersecurity
vulnerabilities. Just look at U.S. credit reporting agency Equifax, which
announced recently that the Social Security numbers along with other personal
information of millions of Americans may have been compromised.
That's a catastrophic
breach. And this kind of thing happens all the time. So, there's no use
worrying about bitcoin "hacking" when you can take full personal
control and accountability for securing it yourself (rather than be at the
mercy of an incompetent third party).
? No. 3: Bitcoin is used by criminals...
A recent Fortune magazine
article published the following quote...
"Bitcoin's core use remains what's it's
always been: paying for drugs or extortion fees on the Internet."
The suggestion that
bitcoin's core use is for buying drugs and extortion is nothing new – and it's part of the media's ongoing narrative. It's
understandable in many respects. After
all, there have been recent ransomware hack/virus attacks that demand users pay
a small ransom in bitcoin to unlock their computers.
And also … there is the FBI's 2013 takedown of a Silk
Road? Silk Road was an online
marketplace used to sell illegal drugs, dirty pictures, and stolen plastic. These criminals thought that because bitcoin
operated independently of the U.S. government, their activity couldn't be
traced.
But they were proved
wrong once the government shut Silk Road down, and made an example of this
illegal marketplace. You see, it turns
out bitcoin is nowhere near as anonymous and untraceable as cash.
Bitcoin is pseudonymous. That is to say, a bitcoin address can be
tied to a particular user. You may not know who that user is, but that user has
an identity. Think of it like a username on a website. You may not know who's
behind it, but that username is tied to a particular person
– and their actions are tied to that username.
The whole point about bitcoin is that it's actually
transparent. Every transaction is recorded on the blockchain and visible
to everyone.
In short, just because
bitcoin has been the method of payment used by some criminals, it's definitely not the currency's core use.
? No. 4: Bitcoin is not regulated...
A lot of people are worried
about bitcoin because the government hasn't come out with an official policy
about how it should be run. In short,
there's no financial system, like the U.S. Federal Reserve, managing its
existence and value. And as a recent Forbes article warns, "there
is no 'good faith and credit' of the government standing behind the
currency."
But think about it: Does a government's promise that
something is "money" protect its value? The U.S. dollar can be printed at will... and
only has value because the government says so.
Plus, more regulation on
bitcoin is quickly being established. For example, the U.S. Commodity Futures
Trading Commission, which regulates futures and options markets, already
approved the creation of options trading around bitcoin. And the U.S. Securities and Exchange
Commission recently came out with a statement hinting that it will soon begin
regulating cryptocurrencies.
These moves will only bring additional
stability to the bitcoin market, and
with it, some new money. But what
about in the rest of the world?
In August and September, China announced a ban on initial coin
offerings, where companies create and issue cryptocurrencies to the public
in exchange for bitcoin or ethereum (the second-largest cryptocurrency).
But China didn't
"ban" bitcoin. And even if a government did want to ban it, the
question is "how"? That cat's already out of the bag. And bitcoin
doesn't answer to any government. There is no bitcoin head office, no CEO, no
board of directors.
What's more, there's no incentive for any major economy
to "ban" bitcoin. (Japan,
the third-largest economy in the world, made it legal tender.) Any
government that does ban it is simply saying "we don't want innovation,
technology jobs, new companies, or enterprise in general."
Now, don't get me wrong –
there is and will be regulation, and there may even be a temporary shutdown of
the exchanges. But regulation is a
different story altogether. For example, don't think for a second that Uncle
Sam is going to let you make 10 times your money on a cryptocurrency trade and
not pay your "fair share" of tax to the coffers.
? No. 5: Bitcoin is too volatile to invest in...
Most people look at
bitcoin's daily price changes and write bitcoin off simply because it's more
volatile than your typical blue-chip stock. But these swings are growing
smaller, as more and more people move money into bitcoin.
According to investment
firm ARK Invest, at the beginning of this year, "bitcoin's daily
volatility was about one-fifth that of five years ago, and 28% less than
January 1, 2016." And this trend
should continue as time goes on... and more money flocks into this space.
That said, even with
this level of volatility, bitcoin delivered better risk-adjusted returns than
stocks, bonds, gold, and real estate over the past five years. In fact, over
the past year alone, bitcoin performed twice as well as stocks, on a
risk-adjusted basis.
I'm not saying bitcoin
won't be volatile. Like any asset, cryptocurrencies will continue to experience
rallies and corrections. Don't fall into the trap of thinking "this time
is different" and that bitcoin will go up forever. The cryptocurrency
could absolutely be in for a short-term price bubble. But over the long term,
the upside is far from over. You just need to proceed carefully. And
"invest" no more than you can absolutely afford to lose.
Don't believe the media hype...
As I said earlier, the
media doesn't really understand bitcoin. So, what you read in the mainstream
media on cryptocurrencies should be taken with a liberal grain of salt.
The truth is, bitcoin
is just a cryptographically scarce and secure medium of exchanging value.
Bitcoin, and the technology behind it – called the blockchain – is quickly
changing the world. And it's here to stay. Being on the outside (and not
understanding it) will limit your ability to profit.
So, if you're not
familiar with it, now is the time to make the effort. Stay tuned for more to come in this new “CRYPTOCURRENCY” space from the GGIS Portfolio newsletter in 2018. If you aren't already a paid GGIS
Subscription, sign up today.
Until the next time!
Tuau (Thank You Much),
Asar Maa Ra Gray
Tax, Financial & Veteran Consultant Services
G&G Associates
757-271-6068 office
866-361-3872 toll free fax
www.gngassociates.net
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