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Three Reasons to avoid Bitcoin or any other cryptocurrency

In this post, I discuss why I will not (never?) invest in Bitcoin or any of the 900+ cryptocurrencies in "circulation". This is a refinement of an earlier post: Bitcoin: Should we use it as a currency or as an investment? in which I had stated my unease with it as an investment even though the concept is rock-solid.

Note 1: this post is about "using" and "investing" in Bitcoin and not about getting a taste of crypto. This means having an exposure of at least 10% or more in the portfolio. A person earning 1L a month with a SIP in an equity fund for Rs. 5000 is an equity taster and not an equity investor. The same applies to many (if not most) Indian  Bitcoin "investors". It should be obvious that such a taste hardly means anything in terms of wealth. Perhaps this post can shed some light on whether it is worth the trouble.

Note 2: I have nothing against the "concept" behind cryptocurrencies. On paper, they are solid and have a wide variety of applications if the mining is removed. My problem is that there is more to a currency than just cryptography.

Note 3: If you disagree with me, feel free to express yourself in the comment section (not the form for Questions), and do also mention if you are Bitcoin taster or investor.

1 A system for electronic transactions without relying on trust seems unlikely

The best source for understanding how bitcoins work is Satoshi Nakamoto's white paper: Bitcoin: A Peer-to-Peer Electronic Cash System

His (or their) aim is to create an

electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party

My problem with this is, trust can be eliminated in the actual transaction, but that is only a piece of the puzzle.

You hold money in the bank, money at home, money in mutual funds, stocks, bonds etc. The amount of time the money is "held" in those accounts is way, way, way higher than the amount of time involved in a transaction - money added or subtracted.

Bitcoin cryptography eliminates trust from the transaction. It does so extremely well. There can be little argument about this.

However, the Bitcoin has to be "held" someplace for most of the time (even though Bitcoin transactions are like 1000s of times slower than normal transactions). This place is, of course, the Bitcoin wallet.  This holding is purely based on trust.

We need to trust that the wallet provider will not run away with our coins ---> So far, so good?

We need to trust that the wallet provider will be able to "encash" our Bitcoins whenever we want ----> So far, so good? Nope, there is a precedence of trouble: Bitfinex

We need to trust that the wallet provider cannot be hacked that easily ---> So far, just plain awful. You can do a search for "how to hack bitcoin wallets" to get nice hack tutorials.  Click on "news" to get the latest on hacking details.

In the last post, I mentioned,

probability = prudence,

and possibility = paranoia.

When it comes to cryptocurrency, the possibility of a hack has long transformed to the probability of a hack. For the simple reason that it has captured the imagination of hackers. If someone is determined to hack, they will always be successful sooner than later.

Crypto storage is not secure enough. Then there is the issue of safeguarding the "coins" at our end. In addition to the above-mentioned trust, we need to be personally secure with identities, keys etc. else the coins will just evaporate.

Sorry, I have better things to do, and better things to worry about.

I am reminded of a line in my all-time favourite movie: Lawrence of Arabia

 Young men make wars, and the virtues of war are the virtues of young men. Courage and hope for the future. Then old men make the peace. And the vices of peace are the vices of old men. Mistrust and caution. It must be so.

I am too old for this $%^&. I am however open to crypto receipts and payments when there is a regulator in place. Yeah, yeah I know the motive behind crypto is to prevent regulation and all that. To hell with that notion, a Bitcoin wallet must have a regulator even if the transactions do not.

2 What is a Bitcoin? Currency or Commodity?

The fact the people buy and hold a currency (for whatever period) in the hope that they will encash at a higher price is, in my opinion, a failure of cryptocurrency. And I expect this to happen at least until there is a "mining" component or as Muthu Krishnan points out, a freedom to add more decimal points to the Bitcoin*. To invest in something that is (or can) constantly changing form makes no sense (to me)

  • As of now a one BItcoin has 100000000 (eight zeros) sub divisions like one Dollar has 100 cents. So 1 Satoshi  = 0.00000001 ฿. The Bitcoin community is free to add more zeros to it when transactions increase and no more Bitcoins can be mined. About 1500-2000 Bitcoins are created out of thin air each day and this will continue for several years - most of our life times (depending on interim protocol changes)

It amuses me that Japan has called a supposed currency (meant for transacting) a commodity (meant to be collected). This maybe for getting more tax, but that is exactly what the Bitcoin is today. The investors piggyback on the miner transaction fees (which results in the production of more coins). Yes, Bitcoin price is meant to increase.

Today about 35% of all available Bitcoins are held in about 1000 wallets (and this may not mean 1000 individuals). So one of the key reasons for Bitcoin volatility is the lack of enough coins in active circulation. To me, the Bitcoin is a commodity because of this hoarding and not because of the mining.

Hoarding a currency makes transactions more expensive and this, in turn, drives away large institutions (besides the security concerns which will take real money to address). The lack of large volume transactions makes the price volatile and it is a circle!

Bitcoin is currently far from what it was actually intended for. Investing in an asset that behaves differently from what it was designed for, is plain illogical.

3. Investing is not an adventure into the unknown

Ransomware hackers knew that it would be near impossible to trace their identities. This is why they demanded pay in crypto.  This is a direct consequence of decentralization. As someone said, crypto is indeed the "dark side". Not because of the cryptography, but because of decentralization. Regulation has many cons, but it would be stupid to assume that it has no pros.

The trouble with decentralization is that we have no idea what the pros and cons are. I have no interest in finding out first-hand. Since it all "out there in the open", I will settle for a ring-side seat. Investing is not about exploring the unseen and seeking adventure. It is about taking risks that are reasonably familiar.

These reasons are enough to not even use it as a currency.

Over to you. What do you think?

================================

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5 thoughts on “Three Reasons to avoid Bitcoin or any other cryptocurrency

  1. Yogesh anand

    Slowly n slowly countries mightnapprove bitcoin..japan did it n vitenam,russia might also do it..
    I heard digital currency in PM modi this year independence speech.
    Future propect can be good.

    RIPPLE cyrptocurrency works on centralization.

    Reply
  2. Pingback: Three Reasons to avoid Bitcoin or any other cryptocurrency | Blockchain Wiki

  3. Jagan

    Excellent Analysis Here !!!!

    Let me add a fourth reason, though political.

    Fiat Currency and its after effects (ability to inflate currency in circulation indefinitely) is the bedrock of modern democracy as it is understood and exists today. Even non democracies (like China) critically use this to keep the population happy. To think that this fiat currency can be done away with using Crypto is sheer lack of understanding of the situation. At least till the masses/population across big nations are able to understand the need to have government sizes in proportion to what they want to pay as taxes.

    Given all this, dont c Cryptos ever taking over conventional (fiat) currency unless Crypto is co-opted (some how) to work with Fiat. In which case Crypto currency loses its only advantage.

    Reply
  4. Deepak

    Such a big article is an effort. I laid it. But almost all you have printed stems from lack of understanding rather than depth of it.

    Reply
  5. Shashank

    We need to trust that the wallet provider will not run away with our coins.

    No we don't. You can store them in the wallet of your choice which resides on your PC which if you may prefer to be disconnected from Internet. Read about cold storage. You can even store your coins on a piece of paper just like you store your passwords.

    The fact the people buy and hold a currency (for whatever period) in the hope that they will encash at a higher price is, in my opinion, a failure of cryptocurrency.

    Once the bitcoin reaches masses, they will see its true value as a medium of transaction rather than using it for hoarding. Right now there is too much emphasis on BTC/USD rates.

    Volatility is a huge deterrent to adoption at the moment, but I believe crypto has a bright future although there may be other noob currencies that make it big rather than bitcoin.

    Reply

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