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BookmarkTalking about the downside of bitcoin is like running into a wildfire. Nobody wants to do it when the upside is heading into the stratosphere. Who’s talking about a top, much less a bottom?
Yet there is a real downside to bitcoin and other cryptocurrencies. It’s almost impossible to quantify, but you can look at some red flags and exercise some caution.
– Bitcoin can still be hacked and stolen. Like any other cybersecurity issue, every dark hacker in the world is trying to steal bitcoins. It’s a 24/7 enterprise.
Think about it. If you have the technical chops, it’s much easier to steal bitcoin than money in a bank. You don’t need a gun, getaway car or have to face armed security guards or cameras. All you really need is a computer.
According to Business Today:
“As per Coindesk, a similar virtual currency exchange, one third of the two third Bitcoins mined are lost forever. Reuters says more than 9.8 million Bitcoins have been stolen from exchanges since 2011, roughly around $1, 6 million as per the current price (as of Dec. 8). The reason for disappearance can be anything like hacking, or hardware failure.”
The thievery will continue. Hackers recently stole some $78 million in bitcoin from Nicehash. And remember the $460 heist from the Mt Gox exchange three years ago? Anyone who hasn’t taken the proper cybersecurity cautions will be at risk.
– The Pros Will Be Short Selling. When a host of professional traders get into the game, they will be betting both ways, mostly through futures contracts. This will happen soon and the impact will be significant.
To pretend that short selling won’t trigger even more volatility in cryptocurrency trading is foolhardy. When traders smell a trend, they’ll pull the trigger to sell because they’ll make money on the downside.
The CBOE launched its XBT bitcoin futures trading on Dec. 10. The CME Group started offering contracts on Dec. 18.
– Volatility Will Increase. With professional traders getting into the mix and millions betting on the upside, that will only amplify the downside, especially when there’s panic selling.
Keep in mind that “animal spirits,” not any market or fundamental valuation, is at play here. Pure emotion — in this case greed — only increases volatility.
The great economist John Maynard Keynes once said “the market can stay irrational longer than you can stay solvent.” Keynes bet big on currencies and commodities after World War I, and nearly got wiped out — twice.
Although Keynes later made a fortune in stocks, his success was based on buying bargains and holding them.
– Timing Decisions Will Be Terrible. Let’s say you’re just in it for a few trades to make some easy money. When do you pull out? Most have no idea and will stay in — even if the market plunges.
This has been a problem with amateur stock investors for decades. It’s natural behavior because our natural biases are to either be too confident or too fearful. When those emotions become entangled with trading, the vast majority of people lose money.
Bitcoin will eventually bite millions of investors, mostly because they won’t know when to get out. Although certainly you can make money in it, don’t pour most of your life savings into it.
Moreover, ask yourself if will you be able to sell when you need to. There will be more technical issues as exchanges try to keep up with the demand. Coinbase, which handles about one-third of bitcoin trades, recently had an outage. The technical infrastructure is trying to catch up with millions of people who want to own and trade cryptos.
At the very least, don’t borrow to buy bitcoin nor consider it your retirement fund. Exercise some skepticism on how much to hold. Bubbles are deceptive because nearly everyone is optimistic at first — until they’re not and then start selling.
“If you look at what has happened in the past,” notes Stefan Ingves, governor of Sweden’s Riksbank, “when it comes to reaching those type of heights, being it tulip bulbs or a bunch of other things over the centuries, the odds are against those who actually think that this is going to be the future.
Forbes
12/26/2017
