Opinion

The Bitcoin situation - explained in simple terms

Far too many common people are silent about Bitcoin. They're either invested in it, afraid of criticism, or lazy to express their views. Here are my thoughts -

I do believe in blockchain AND bitcoin and have followed ICOs for quite some time now. While I still believe in the blockchain tech, I no longer believe in bitcoin.

Let's consider this scenario for a moment -

A family trades goods among themselves using $. The head of the family controls the flow of free $ into the family in a timely fashion. However, sometimes too many $ get released causing inflation. Also, the head charges a fee for every transaction that happens among the family members. A few of them, fed up with inflations, transaction fees and the useless role that the head plays, develop a new currency #, and they say there will only be 100 # released in the lifetime and that it is the only currency that will be prevalent in the future because of the underlying mechanism, and that transactions are verified within the family through a process called mining. It takes time for everyone to comprehend the beauty of the technology and how it can solve all of the family's problems and leave only governance (and leave out fiscal responsibility) to the family head.

  1. Everyone starts buying whatever # they can get using the all the $ they have since the number of # is limited. The value of # increases. The # cannot actually buy many goods yet, but trading # seems to be a good idea to increase the leftover $.
  2. One smart person in the family keeps maintaining the transaction records (mining) so she can get more #. However, she soon realizes that the economics of mining is not really working out and that the algorithm behind mining only keeps getting tougher.
  3. Meanwhile, word spreads about the technology and while they are still trying to wrap their head around how the whole system works, they don't want to miss out on the trading opportunity, and so begin investing.
  4. (We're here now) The word spreads further, and people who not only don't understand but also don't have too many $ also invest start pitching in whatever they can, again not to lose out on the opportunity, since they realize they can invest in parts too (e.g. buy 0.0001 # using whatever $ they got).
  5. (future) Eventually, the smarter folks realize that # means nothing unless they can actually buy real things, and they exit at the right time and convert all the # they have back to $ by selling it to others who haven't realized the bleak future, leaving rest of the family # that is now worthless.

If you think investing in penny stocks or pyramid schemes is bad, bitcoin trading just is a combination of both. Most informed people are considering investing 5-10% of their assets into this class considering the volatility. Most uninformed people will consider investing higher % age of their assets into bitcoin out of greed or necessity. Smarter ones will pull their money out from the system at the right time. Not so smart ones (usually poorer as well) will hang on and lose their money. None of the institutional investors will make losses; most would have short positions on bitcoin or have divested their risks enough. It is the common man that will suffer leading to more disparity in wealth in the world. For every rational person who is investing in bitcoin as a way to diversify or as a gamble, I believe there are 10 others who are looking to make some real money. Just like a pyramid scheme, the last one to enter loses and just like penny stocks, people can get in with minor investments and take the risk of heavy volatility.

In every angle, this is madness. Please let it end before 2018 begins.