Can You Make Money Investing in Bitcoin?
There's not a day that goes buy that you don't hear at least one reference to bitcoin. In case you have been held in isolation for any length of time, Bitcoin is what many are calling a cryptocurrency.
While there is some truth to this, it doesn't tell the whole story. Bitcoin is more of an infrastructure with cryptocurrency (bitcoin) as one application. This application happens to be the only known application that is running on the Bitcoin infrastructure. But, it could theoretically handle more than this.
Note: it is generally accepted that Bitcoin (capital "B") references the infrastructure or blockchain, while bitcoin (lowercase "b") references the coin itself. I tried to keep this straight throughout, but my darn spellchecker is going haywire. So forgive any deviations or confusion if I strayed from convention.
Another use of bitcoin is as an investment. Since its inception, people have been exchanging bitcoin for other currencies, and in some cases other cryptocurrencies. These people are viewing bitcoin as an investment. Some of these people are even making some serious money in relation to the currency they exchanged it on.
All this fervor has got to make you wonder if it's time to get in yourself. Should you exchange bitcoin for your currency?
Value Based on Participants
Anyone who gets involved with bitcoin is partly responsible for the value of the coin. What this means is there is no value to the currency other than what its participants place on it. You can't say bitcoin is valuable because its earnings are good. There are no earnings. You cannot state that bitcoin has a book value of X. There are no assets to back it. Book value usually requires something to back the assets. In the business world, a company could liquidate its factories in order to pay its creditors. The company has value in relation to those assets. There is no such concept with bitcoin.
When someone buys a parcel of land, they can use that land to create value. Take farmers for instance. They take a parcel of land and they plant seeds on it. When those seeds grow into full fledged produce, they can turn around and sell that produce for a profit. They do this again and again.
If Apple comes up with a new device, they create value for their company as people will desire to buy the device. Further, the company may make money from consulting to help users use its products more efficiently. Then, you have app developers who pay Apple to house their apps on the Apple platform. Apple has several other methods (or will) that will help it generate income.
None of this can be said about bitcoin or many other cryptocurrencies for that matter. It doesn't have any product capable of increasing in value. There is nothing value-producing about the coin itself.
On the other hand, a cryptocurrency's infrastructure could be used to create value. Developers can create applications on the platform where they can earn money, just as apple does on its platform.
The blockchain is the technology behind many of these cryptocurrencies. In short, the blockchain is software that is often compared to a ledger. In terms of financial transactions, this ledger would be similar in some ways to a bank ledger. However, a block chain implementation does not have to be based on finances.
A growing use of the block chain is for contracts, or more specifically, smart contracts. The next time you buy a big ticket item like a house or a car, you may be using the block chain as your means of contract settlement. That is the direction the world seems to be headed in.
The Takeaway?
So what does any of this have to do with investing in bitcoin? The point is, bitcoin is not an investment in and of itself. It is a digital currency that can be used to exchange goods and services. It's a conceptual entity. Its value is solely derived from what people are willing to pay for it.
It gets even fuzzier when you consider what value you should apply to products purchased with bitcoin (or other cryptocurrencies). Currently, the value of these coins are in terms of the currency of your home country, at least when you are transacting with others who share that same traditional currency.
What if you took away all central bank currencies? What value would a bitcoin take if that were to happen? We generally know what constitutes a good value for products we purchase with our home currencies. In the United States, a gallon of gas may be $2.45, give or take (at the time of this writing). But, if you didn't have any fiat currency (a currency backed by a government via a central bank), what would the value be?
Can We Do Away With Central Bank Currencies?
I am not stating that central bank currencies are going away anytime soon. This is a complicated issue. It would imply that governments would no longer have the money they need to run (and protect its citizens.) But, let's just pretend like we found a way to rid the world of governments via the use of cryptocurrencies.
The good news is there would be no more exchange rates when purchasing products. Bitcoin is a worldwide currency. You could have exchanges between cryptocurrencies, and that would complicate matters. However, those other cryptocurrencies are likely to be worldwide currencies as well. So, there won't be any manipulations by governments or bankers.
But, there is still that gnawing issue of what value to place on your products in relation to bitcoin when fiat currencies are not in the picture. Because it is a worldwide currency, will we have to value products the same in every country? Would a gallon of gas cost 1/2000th (hypothetically) of a bitcoin in the United States as well as the United Kingdom? What does 1/2000th of a bitcoin even mean?
I don't have the answers to this. It's been puzzling me ever since I started researching and writing about cryptocurrencies. But, hopefully this issue shows you how this complicates the bitcoin-as-an-investment landscape. Doesn't it mean that you could be investing in fuzzy-valued instruments?
I understand that cryptocurrencies are in their infancy. In fact, one report I read suggested that only about 1% of the world population is involved with them in one form or another (investing or working for bitcoin, etc.) This 1% means there is plenty of room for the craze to grow before its considered a bubble.
Is Bitcoin a Bubble?
People are certainly getting intrigued by the concept of bitcoin and cryptocurrencies. The bubble phase in speculation usually starts when your family and neighbors are discussing what you think about investing in the instrument. My neighbor did discuss what I thought about investing in bitcoin a few weeks ago, by the way. He has since told me that he has put a small amount of money in some cryptocurrencies.
You can usually tell the maturity of a bubble when the dude next to you at the bus stop is talking on the smartphone how he is making a killing with bitcoin. This pattern repeats everywhere you go. I don't believe we are there yet.
We will get there eventually. This bubble will have worldwide ramifications because bitcoin is a worldwide phenomenon. What can't be determined at this stage is just what that means for the world when it happens. If you don't believe it will happen, just think back to the days of flipping houses. You can come up with other examples such as the dot-com bubble all the way back to the 17th century tulipmania bubble. The participants in every single one of those events thought they would last forever. Bitcoin is no exception.
What I won't do is try to guess when it will happen, the bitcoin crash. The biggest problem with all bubbles is they tend to outlast everyone's pocketbooks.
I know I'll get plenty of push back from people who are making money in the cryptocurrency space. I have no doubt they are. However, as the craze gains momentum, and it will, placing all of your money on a fuzzy-valued asset will likely lead to a bad outcome for you and anyone else who does.
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