Bitcoin’s a joke, but there is serious money to be made

I’m going to talk about bitcoin and cryptocurrencies.

Now if my research is correct, about a quarter of you are rolling your eyes at me right now, and the rest of you are sitting closer to your computer screens.

Here’s the thing though – I’m personally not a fan. Never have been. Likely never will be.

Also read: Cryptocurrency screener: All currencies

What I want to talk about here is the ability to make money from cryptocurrencies; why the ‘currency’ itself is insulting to economics; and why the technology behind it is the real story.

Bitcoin as an investment

I’m going to focus on bitcoin but there’s a whole bunch of currencies you can invest in, including bitcoin cash, Ethereum, Stellar, and a couple of the other fairly small alternative currencies as well.

It’s actually relatively easy too. You simply find an exchange that deals in the currency you wish to trade, sign-up, send photo I.D., wait for approval… and Bob’s your uncle. It’s all very secretive though. You’re meant to be completely anonymous and, while trading, essentially fly under the radar.

That’s why the authorities are so uncomfortable with it all. You can understand why. How on earth do you tax, or regulate, a market full of ‘ghosts’? You can’t. That’s why the bottom fell out of the market for cryptocurrencies a couple of weeks ago.

Importantly though, the market for bitcoin has at least recovered. A trader told me he, “there’s so many people trying to get involved that there’s just a backlog of people just trying to get verified.” That tells you something. While the market crashed, there’s still a belief that bitcoin has a way to go yet.

I personally wouldn’t touch it with a ten-foot pole, but I can see if you were a “betting man/woman”, it has the potential to be quite a lucrative little trade.**

Also read: How to buy Bitcoin

An insult to economics

So the sub-heading towards the top of the page reads, “Bitcoin as an investment”. I want you to know that I used the word “investment” very loosely.

You see despite bitcoin being categorised as a “currency”, it is not a currency. There really is no such thing as “cryptocurrency”. For a currency to be legitimate it needs to be: backed by something, like an asset, or something with intrinsic value, like gold; it must be legal tender (and managed by a local authority); and generally accepted as a medium for exchange… among other qualities.

The only thing bitcoin has going for it is that it is accepted as money by some organisations, and rational people are willing to pay money for it (so it has value).

However, if it can’t be taxed, it can’t buy you a Mars Bar, and it isn’t backed by anything at all – and in fact is poorly viewed by certain authorities.

It’s insulting to economists to call it an asset, an investment, or a currency.

I actually find it fascinating that speculators are willing to pay so much for bitcoin. It could be a sign of the times, or a symbol of the rejection of various aspects of mainstream capitalism.

Who knows. I suspect Milton Friedman would be rolling his eyes.

Also read: ‘Expect the bulls to run’

The technology is exciting

The one thing I can say about cryptocurrencies is that the technology behind them is quite exciting.

It’s called blockchain.

Here’s an excerpt from Investopedia about blockchain technology:

“… the technology is primarily used to verify transactions, within digital currencies… Doing so creates an indelible record that cannot be changed; furthermore, the record’s authenticity can be verified by the entire community using the blockchain instead of a single centralized authority.”

That’s just a whole bunch of tech speak for ‘the whiz-bang technology removes the need for banks in financial transactions.’ That’s kind of interesting!

Phil Dundas heads up technology for investment bank, Schroders, on Wall Street.

He puts it like this:

“Working on Wall Street and working in financial markets, we all know the benefits of a distributed ledger — which is what bitcoin and all of the technology behind it like blockchain bring to the industry — is absolutely what is making this a really interesting proposition.”

For what it’s worth

So, investing in cryptocurrencies? Heck, I can’t stop you. But maybe consider it as an investment in future technology, rather than an exciting new ‘investment’ vehicle.