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Bitcoin Problems

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Bitcoin is a cryptocurrency that means it’s not tied to any particular central bank or any particular country Instead it’s managed by a distributed algorithm

Computers all across the world maintain something called a blockchain and all of the chain of trust is maintained in that blockchain Now for paranoid people bitcoin is very attractive because it’s anonymous you can’t link your ID on bitcoin with your real ID Now personally I would never invest in bitcoin or any other cryptocurrency for that matter so to see why let’s look at the problems with bitcoin There have been some really abysmal reports on bitcoin in the media Particularly annoying was a story reporting tha bitcoin was worth more than gold

Reporters would trot out this graph showing the price of Bitcoin and the price of an ounce of gold and they’d show that one line was crossing the other Here’s the same story on the BBC and in many other news outlets The other kind of story which is misleading is where they talk only about the return on bitcoin which admittedly has been very high So let me tell you why these stories arouse no interest in me whatsoever Investors should concern themselves with risk as well as the return of each asset class and if we look at the risk of bitcoin, this is the volatility since 2014, we can see that it’s extremely high

In this graph the riskiest assets are at the top and the lowest risk assets are at the bottom You can see that most developed market currencies have a volatility of about ten percent and that means that in a typical year their price would move up or down by about ten percent Gold is a little bit more risky at fourteen percent volatility, developed market equity such as the FTSE 100 will give you a volatility of around fifteen to twenty percent Emerging markets will be a little bit higher between twenty and twenty-five percent or maybe even thirty percent Oil’s the highest volatility of the normal asset classes at around thirty five percent per year but bitcoin is by far the most volatile, by far the most risky

Its volatility is twice that of oil and almost seven times that of a normal developed market currency Now that’s what the reporters should be talking about as well as the return and it puts it way beyond any kind of risk I’m willing to take with my life savings But volatility isn’t the only reason I’ve never invest in Bitcoin Oh no If you look at the website coinmarketcap

com you’ll find two hundred and more alternative cryptocurrencies Bitcoin’s currently the largest but there are many alternatives so there’s no reason why Etherium, Dash or any of the other competitors couldn’t overtake bitcoin and turn it into the Betamax of the cryptocurrency world That’s the danger with any disruptive technology; it may itself become disrupted by competitors More worrying from bitcoin’s point of view is that central banks are also looking at creating digital currencies Here’s a call for abstracts for a conference run by the Bank of England in 2017

If the Bank of England were to issue a digital currency that would blow bitcoin out of the water, it would be very hard to compete with a central bank’s digital currency One of the philosophical principles of bitcoin is that it doesn’t require you to trust a single counterparty Bitcoin is based on cryptographic proof in other words solving hard computer problems instead of having to trust a counterparty, or at least that’s the idea If you look at the plumbing behind bitcoin what you find nowadays is that it’s dominated by four very large bitcoin miners Between them they make up fifty-four percent of the transaction checking system, or the hash rate, of bitcoin

So in other words instead of having one Big Brother you have four Big Brothers So far from being a distributed system it’s now fairly centralized in these four large companies and collectively they could choose to block, reverse transactions or even change the entire bitcoin protocol Then there’s a problem with criminals Because bitcoin provides anonymity it draws a wide range of shady characters into the cryptocurrency The cryptocurrency’s widely used by criminals for things such as ransomware where someone takes over your computer and forces you to make a payment to unlock your computer, or money laundering, or selling stolen credit card numbers, or payments for illegal drugs and weapons

Personally that’s not the kind of company I want to keep Then there’s the problem with exchanges If you want to convert your money from cryptocurrency back into normal currency you have to go via one of these exchanges Now many of them are unregulated and as a result there have been some very large scandals where large amounts of bitcoins have simply disappeared While the system remains unregulated that remains a danger

But to some extent all those problems can be overcome The primary worry for me is regulation To give an example, when China clamped down on its capital controls bitcoin exchanges were very tightly regulated and as ninety eight percent of the bitcoin exchanges were in China there was a dramatic fall in the value of bitcoin A pair of brothers called the Winklevoss twins tried to create an exchange-traded fund for bitcoin If you look at the SEC ruling it provides a real insight into the problems with bitcoin

And again, when that was rejected the value of bitcoin fell very sharply, coming as it did with China’s regulatory clampdown You can find the ruling on the Winklevoss Bitcoin Trust ETF on the SEC website Naturally, the SEC is trying to prevent fraud and to protect investors They stipulate that the ETF would have to satisfy two criteria: it had to have some kind of surveillance sharing agreements with the markets which would trade ETFs and secondly those markets have to be regulated The primary problem was the unregulated nature of bitcoin exchanges and that leaves Bitcoin open to manipulation or fraudulent activity

Mark T Williams wrote one of the letters to the SEC advising them about the problems of allowing the ETF to be created He points out that many of the exchanges are based in places such as China, Singapore, Hong Kong and Bulgaria, and also that many of the exchanges have gone out of business and in many cases that’s resulted in multi-million dollar losses And my primary worry would be that bitcoin would be successful because this in itself would lead to failure Governments in developed countries have certain powers: they control the military, they control the creation and maintenance of law, they control the collection of taxes which they use to fund their activities, and they control the creation of money and the maintenance of stable money

If you try to take away any of these powers it usually results in tears It really is like taking sweets from a baby Ultimately all currencies are based on faith The US dollar only has value because we believe it has value and when that faith disappears you get hyper- inflation as happened in Zimbabwe Hence the 100 trillion dollars Zimbabwean note

But personally I do have a faith in the UK Parliament I appreciate that the tin hat brigade may have issues with trusting the government but the Bank of England has huge resources behind it to maintain the stability of the pound The Monetary Policy Committee exists purely to maintain this stability and, okay, they’re not perfect, but generally they do a very good job So that’s why I put my faith in the pound and not in crypto currencies Remember this is not a recommendation

Seek independent financial advice if you’re thinking of investing in cryptocurrencies Now maybe you think we’ve got it wrong You think bitcoin is fantastic! Or maybe you’ve lost money with bitcoin or another cryptocurrency If so why not tell us about it? We’d love to know! Tweet us @PensionCraft, message us on Facebook and if you like these videos subscribe to our channel

About the Author Dancake

Hey hey hey. It’s Ville and welcome to my blog. I am a tech enthusiast and always looking for ways to generate new income streams. At the moment Bitcoin cloud mining is one of the most promising ones and that’s why I created this website. Hope you like your stay. If you want a quick start guide about making passive income with cloud mining check out this guide.