It goes without saying that most people have heard of crypto currencies. Those digital “dollars” based on something called a block chain. Allow me to confess that I didn’t pay much attention to Bitcoin at first. As an IT expert and a writer about the financial markets many are shocked that I didn’t “get it”. I wanted to share with others the “cons” I saw with Bitcoin.
Bitcoin was written by Satoshi Nakamoto. This turns out to be a fake name. Even if we assume for a moment that the creator was Craig Steven Wright, it still doesn’t give me great confidence having a single person behind not only the concept but everything else including security of an entire currency. Are banks and governments perfect? No. But at the end of the day, an epic fail by one of those leaves teams to clean up the mess. In this case, at the onset, I wasn’t so sure what would happen if the whole concept collapsed. It was, in my opinion, like online gambling.
Bitcoin is not backed by anything. Yes, I agree that most currencies are no longer backed by anything tangible either. Bitcoin’s usefulness, where they are accepted, has come a long way. They were little more than a novelty at first, and people took them for the sake of getting publicity. Now if only Chucky cheese tokens had taken off, I’d be rich!
Bitcoin(s) as a store of wealth? I would argue that money, real money, needs to preserve wealth. If you get a Zimbabwe note and it’s useless a month later, then no one in their right mind will want to trade for it. The value of Bitcoins has indeed gone up (and up). I would argue, however, that they have questionable value for the long term. Why? Simply because everyone will want in on the new ride. I am working on a project with a large IT firm on a crypto currency of their own. This, in my opinion, at least brings major corporate resources and a commitment to the table.
Bitcoin mining. If you don’t know what mining is, be ready to be disappointed. A miner uses a computer to perform transactions and transit information needed for the Bitcoin system to work. Miners get paid a small percentage (like a banking fee) to do this work. A bank has its own system to process your transactions. Bitcoins use miners to do this; it is decentralized.
Why should we care about whose systems process the transactions? For one, some people are mining not to make money but to study the backend in the hopes of figuring a way to circumvent the process. For another, as the amount of money paid out to perform this work (the mining) decreases, it becomes less and less attractive for individuals to want to mine. Am I the only one to think this will become a problem? I won’t even get into the limitations place on the miners due to Bitcoin’s design.
In the end, Bitcoins are here to stay. I predict there will come a shakedown where only a few remain backed by companies, banks, governments or a combination of all three. If you’re looking at Bitcoin to store value by avoiding government fiat currencies, I’d suggest looking into owning some Gold or Silver. Having said that, there is a company that James Turk is involved with called Gold Money that offers a gold backed Crypto Currency. I recommend having a look if digital money interests you.
This article was first published on David Morgan’s site, The Morgan Report.