Everyone asks me questions about bitcoin.
What exactly is it?
Why is it so worth so much?
Should I buy bitcoin? How do I buy some?
The guy down the road said he got rich with it. (Yes, people actually buy bitcoin because their friends "got rich"). It seems bitcoin "mania" is everywhere.
However the truth is that bitcoin has little intrinsic value. Let me explain why I think this.
Let's start our discussion with the technology that powers bitcoin: "blockchain." Blockchain technology is a record of all transactions ever done. Imagine a gigantic piece of paper that lists every transaction ever completed. Then imagine that there are thousands of copies of this paper, and all of them are automatically updated when any two people agree to exchange bitcoins.
Every time a transaction takes place, all these copies are checked for consistency to make sure both parties have the bitcoins they claim to have. If everything clears, the new transaction is added to all the pieces of paper at once. This clever idea makes it possible to have certainty over transactions, without needing any third party (such as a bank) to verify it.
However, the worst thing about blockchain technology is that it's free, which means anyone can create any "cryptocurrency" out of thin air, name it whatever they like and start using it to trade with other people.
This explains the emergence of so many cryptocurrencies, such as Litecoin and Ripple – all of which increase or decrease in value depending on bitcoin's price moments. Essentially, bitcoin technology is easily copied- It literally takes less than 24 hours to do so.
Bitcoin is a bubble in my opinion. To recognise this, you need only look at its peak of more than $20,000 — and then recall that it is not even an income-generating asset. It is not productive like oil or a business. The world's greatest investors, Warren Buffett and Charlie Munger, have declared that bitcoin is a bubble which they are nearly certain will come to a bad ending.
The only argument which can be rationally made for investing in bitcoin, is viewing the currency as a "store of value" with scarcity value, akin to investing in gold or other precious metals. There are two fundamental flaws to this argument:
- It remains unclear that bitcoin technology cannot be "cracked". There are some bright people working on the algorithms behind mining bitcoin, if these codes become compromised, more bitcoins could be created and the whole system is compromised.
- Just because something is scarce, does not mean that it has value. If there is not enough income produced by an asset's value over time it's really not a great investment. For example gold has significantly lagged the Dow Jones for the last 100 years.
Foolish takeaway
There have always been manias, from tulips to technology stocks to bitcoin. Ignore the noise. Invest in companies which have strong fundamentals and compound your money responsibly over the long-term.
