Is Bitcoin safe (real) or fake? Here are some reasons the Cryptocurrency investment is illegal and bad for the economy, environment and human.
In a world of digitalization, everything is possible to take a serious trend on the internet across nations provided the majority enjoy and share their feedbacks in a persuasive way to get others to join.
Wherever you see two or more adults or even teenagers having financial chats, be it a face-to-face conversation, a phone convo, or a chat on social media platforms like WhatsApp, Facebook, Snapchat, just to mention a few, the name “Cryptocurrency-Bitcoin” will surely fall under the topics of discussion. Well, what are Cryptocurrency and bitcoin? To anyone who is new to these popular terms, there is a piece of small information provided below that can get you understood.
What is cryptocurrency?
A cryptocurrency is a form of payment that can be exchanged online for goods and services. Simply, A cryptocurrency (or “crypto”) is a digital currency that can be used to buy goods and services but uses an online ledger with strong cryptography to secure online transactions. Much of the interest in these unregulated currencies is to trade for profit, with speculators at times driving prices skyward.
Many companies have issued their own currencies, often called tokens, and these can be traded specifically for the good or service that the company provides. Think of them as you would arcade tokens or casino chips. You’ll need to exchange real currency for the cryptocurrency to access the good or service.
The most popular cryptocurrency, bitcoin, has had volatile price moves this year (2021), reaching nearly $65,000 in April before losing nearly half its value in May. By fall, the price had risen rapidly again: it hit an all-time high above $66,000 before falling back. (You can check the current price to buy bitcoin here.)
Cryptocurrencies work using a technology called the blockchain. Blockchain is a decentralized technology spread across many computers that manage and record transactions. Part of the appeal of this technology is its security.
How many cryptocurrencies are there? What are they worth?
Nearly 15,000 different cryptocurrencies are traded publicly, according to CoinMarketCap.com, a market research website. And cryptocurrencies continue to proliferate. The total value of all cryptocurrencies on Dec. 3, 2021, was about 2.6 trillion, having fallen off an all-time high above $2.9 trillion weeks earlier. The total value of all bitcoins, the most popular digital currency, was pegged at about $1.1 trillion.
Best cryptocurrencies by market capitalization
These are the 10 largest trading cryptocurrencies by market capitalization as tracked by CoinMarketCap, a cryptocurrency data, and analytics provider.
|Binance Coin||$102.2 billion|
|USD Coin||$39.2 billion|
Why are cryptocurrencies so popular?
Cryptocurrencies appeal to their supporters for a variety of reasons. Here are some of the most popular:
- Supporters see cryptocurrencies such as bitcoin as the currency of the future and are racing to buy them now, presumably before they become more valuable
- Some supporters like the fact that cryptocurrency removes central banks from managing the money supply, since over time these banks tend to reduce the value of money via inflation
- Other supporters like the technology behind cryptocurrencies, the blockchain, because it’s a decentralized processing and recording system and can be more secure than traditional payment systems
- Some speculators like cryptocurrencies because they’re going up in value and have no interest in the currencies’ long-term acceptance as a way to move money
What is Bitcoin?
Bitcoin is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries.
Why does bitcoin continue to outperform equities? For one, there’s the idea of scarcity. Only 21 million bitcoin tokens can be mined, which creates a level of scarcity that pushes up the value of these digital tokens.
Another reason bitcoin has done so well is the expectation of a digital revolution. This is to say that bitcoin buyers believe the utility of paper money has come and gone. This could prove somewhat accurate with the pandemic highlighting the potential for physical cash to be a carrier of harmful germs. With the rise of peer-to-peer payment platforms, bitcoin looks to become the superior digital currency.
Bitcoin also benefits from its first-mover advantage in the cryptocurrency space. It was the first digital token to catch on with investors and happens to be the largest on a market-cap basis by a significant amount (it’s five times the size of Ethereum, the second-largest cryptocurrency by market cap). Today, bitcoin serves as the intermediary asset on a number of crypto investment platforms if you want to purchase a less-common token (i.e., anything not named Ethereum or Ripple).
Investing in crypto is a hot trend right now. As of the time of this article, google can produce 3,990,000,000 results when one searches for the keyword “Bitcoin”. There are easy ways to buy Bitcoin — as well as purchase any number of other cryptocurrencies in the news.
However, before you get too involved with investing in crypto, it’s important to take a step back and consider your situation. Just because something seems exciting doesn’t mean it’s a good idea.
Investing in crypto can seem like an exciting way to get in on a popular trend, but it’s important to note that it’s not for everyone.
Buying bitcoin or other cryptocurrencies could be a big mistake! Here are some reasons you might think twice before investing in cryptocurrencies or why you should avoid bitcoin like the plague.
1. The founder and CEO of Bitcoin aren’t known at the moment.
Satoshi Nakamoto is the name used by the presumed pseudonymous person or persons who developed bitcoin, authored the bitcoin white paper, and created and deployed bitcoin’s original reference implementation. As part of the implementation, Nakamoto also devised the first blockchain database. Nakamoto was active in the development of bitcoin up until December 2010.
Many people have claimed, or have been claimed, to be Nakamoto. The top three names are Dorian Nakamoto, Craig Wright, and Nick Szabo.
2. It’s historically volatile.
Cryptocurrency prices are historically volatile, rising and falling quickly. All you have to do is take a look at a price chart for any cryptocurrency. Wide swings from day-to-day are common, even for well-known currencies like Bitcoin.
Other cryptocurrencies also experience wide swings. Ethereum saw a price above $4,000 in May of 2021. But as of July 11, 2021, the price has dropped to just above $2,100. Smaller currencies, like Dogecoin, might see even more dramatic swings.
If you’re looking for something with relatively stable pricing, crypto isn’t there yet.
3. Valuing cryptocurrencies can be difficult.
When valuing stocks, you can look at various characteristics of a company, including its management, balance sheet, and revenues. You can form an opinion as to whether the products and services it offers are likely to succeed in the long run, and you can chart the long-term historical value of various stocks and stock indexes.
Other assets, like commodities and real estate, can also be easier to value. Some of these assets are tangible and can be touched.
Crypto, on the other hand, is more difficult to value. You can’t touch cryptocurrencies, and they don’t have a long history like many other asset classes do. Trying to come up with a value that makes sense can be difficult, so comparing it to other asset classes can be tricky.
4. It’s bad for the environment.
The rise in interest in cryptocurrencies has prompted many people to try mining various coins using computer equipment. However, The New Yorker reported that bitcoin is bad for the environment because the process uses a large amount of electricity — and many of the power plants supplying that power are run using fossil fuels.
If you’re interested in making environmentally friendly investments, be aware that some cryptos aren’t as efficient as others. Carefully consider which coins you support with your dollars if you want to avoid those that rely heavily on fossil fuels.
If this is an issue that is very important to you, you might instead want to consider how to invest in renewable energy.
5. Taxes are really complicated.
Filing your taxes is likely complicated enough without figuring out how to pay taxes on your cryptocurrency earnings.
In the end, how you’re taxed depends, in part, on how you received your crypto. If you use fiat currency to buy your coins and then hold them, they are often treated as capital assets, and you have to determine whether you owe short-term or long-term capital gains taxes after you sell.
However, if you receive crypto as payment for services — for example, I got paid 1 Bitcoin in 2011 to write an article — then it’s considered income and could be taxed as ordinary income, based on the coin’s value on the day you received it. This can complicate issues later. If you invest in crypto, make sure you consult a tax professional.
6. Bitcoin isn’t really scarce.
First of all, bitcoin is only as scarce as its programming dictates. Whereas physical metals, such as gold, are limited to what can be mined from the earth, bitcoin’s token count is limited by computer programming. It’s not out of the question that programmers, with overwhelming community support, could choose to increase bitcoin’s token limit at some point in the future. Thus, bitcoin offers the perception of scarcity without actually being scarce.
7. It has a utility problem.
The king of cryptocurrencies also has a utility problem. To date, only 18.51 million bitcoin tokens are in circulation, with an estimated 40% of these held by a small group of investors. Even considering the fact that fractional token ownership exists, roughly 10 million to 11 million tokens in circulation aren’t going to go very far. For context, the global gross domestic product was $81 trillion in 2017. Meanwhile, bitcoin has approximately $114 billion to $125 billion in tokens freely circulating and not held tight by investors. There’s minimal utility here.
8. There’s a low barrier to entry.
Bitcoin may enjoy a first-mover advantage at the moment, but the barrier to entry in the cryptocurrency space is especially low. All it takes is time and coding knowledge for blockchain — the digital and decentralized ledger that records transactions — to be developed and a digital token to be tethered to the network. There’s nothing unique about bitcoin’s underlying blockchain that other businesses couldn’t one-up.
9. Few (if any) tangible means to value bitcoin.
Another beef with bitcoin is that there’s no tangible way to value it as an asset. For instance, if you want to buy shares of a publicly-traded company, you can scour income statements, their balance sheet, read about industrywide catalysts, and listen to management commentary from recent conference calls and presentations. In other words, you can make an informed decision.
With bitcoin, there is no tangible data for investors to wrap their hands around. There are transaction settlement times and total circulating token supply, but neither of these figures tells us anything about the value or utility of bitcoin.
10. It is already banned in some countries.
Are cryptocurrencies legal? There’s no question that they’re legal in the United States, though China has essentially banned their use, and ultimately whether they’re legal depends on each individual country. Also, be sure to consider how to protect yourself from fraudsters who see cryptocurrencies as an opportunity to bilk investors. As always, buyer beware.
11. Its rumored motive is to kick out the traditional model of banking.
It is been rumored that the core goal or mission of these cryptocurrencies is to kick out the old system of banking. Just as many old fashion ways of doing things have been replaced by modern ones mainly through digitalization, many gurus in these online currencies investment world believe Cryptocurrency will replace the traditional system of banking.
12. Fiat currencies may work on blockchain.
While many enthusiasts point to the blockchain as a public ledger and a secure way to send payments, the reality is there’s nothing stopping fiat currencies from working on the blockchain too. Fiat currencies are currencies issued by a government or its central bank, such as the U.S. dollar.
Some U.S. central bank officials have even suggested the creation of a digital dollar. That means putting the U.S. currency on the blockchain and making it possible to execute transactions using a dollar token. China is currently working on digitizing its currency, and other countries might decide to move forward with similar efforts.
To build on this point, companies are also testing blockchain that’s tethered to fiat currencies. For example, Mastercard ( MA 3.48% ) was awarded a patent in July 2018 “for linkage of blockchain-based assets to fiat currency amounts.” This implies there may not be any need for a made-up digital token to be used at all on blockchain networks.
In the end, cryptocurrencies aren’t especially unique in terms of paying for items. Fiat currencies may follow suit.
13. Blockchain is years from being mainstream.
Blockchain is still years away from gaining real relevance. You still have to find someone willing to accept the cryptocurrency of choice when you pay or convert your crypto tokens to fiat currency in order to complete a transaction. It’s also important to note that many reports show that a relatively small amount of people control most of the Bitcoin wealth.
Specifically, no businesses are willing to make the costly and time-consuming switch to the blockchain without the technology being broadly tested — yet companies aren’t willing to make this initial leap to test the technology and prove its scalability.
Because cryptocurrencies haven’t been widely adopted for payment and still aren’t seen as mainstream investments (they’re often pegged as speculation), it’s difficult to say whether they will breakthrough as a viable mainstream asset class down the road.
In short, blockchain is years away from being a mainstream technology.
14. Fraud/theft is a serious issue.
By no means are cryptocurrencies the only asset to be hacked by thieves, but there are serious fraud and theft concerns that accompany bitcoin. For instance, novice bitcoin investors may not understand the need to store their tokens in a digital wallet, thereby leaving them susceptible to theft by hackers.
While some cryptocurrencies are legitimate, there is also the potential for fraud and theft. On top of that, because cryptos are so trendy, there are investment schemes surrounding these currencies. It’s bad enough that the Securities and Exchange Commission issued an investor alert about fraud surrounding cryptos. One famous example of a crypto Ponzi scheme was the Bitconnect craze that ended at the beginning of 2018.
Additionally, it’s been hypothesized by numerous blogs and publications that North Korea has turned to bitcoin mining and theft to funnel money into its isolated economy. Bitcoin is commonly viewed as the “currency” of choice for criminal organizations. Badly, if someone does manage to get into your crypto wallet, they could steal your coins, and you have no recourse, whether they manage to get into an online wallet or some other wallet.
15. There’s no regulation.
Bitcoin is also an unregulated asset. Though this lack of regulation is actually a selling point for today’s crypto investors given that it provides some degree of anonymity, it’s bad news if something ever goes wrong. Since the majority of cryptocurrency trading and transactions occur outside the borders of the United States, the Securities and Exchange Commission is very limited in what it can do if your digital tokens are ever stolen.
So far, there isn’t much regulation of the crypto market. It’s pretty much the Wild West. There are a number of cryptocurrencies and crypto exchanges, and pretty much anyone can make a coin offering without going through the kind of vetting that a publicly listed company would be subject to.
While the regulatory environment could change, so far, cryptos aren’t protected by SIPC insurance. So if the company managing your crypto holdings fails, you might not have recourse to get your money back.
16. The tax situation is a nightmare.
If you think preparing your federal income taxes stinks now, try preparing them after investing in and/or using bitcoin in any transaction. The Internal Revenue Service expects you to report capital gains and losses tied to investment activity, as well as gains and losses associated with purchasing goods and services.
For example, if you bought a single bitcoin token at $11,000, then used a fraction of your bitcoin to buy a new smartphone for $1,000, you’d have to calculate the value of your bitcoin used at the time of the transaction and recognize capital gains or losses relative to your cost basis. It’s a gigantic headache.
17. We could be in a bubble on the verge of bursting.
With prices rising rapidly over the last several months, there are concerns that crypto could be in a bubble. While there have been ups and downs with cryptocurrencies, the recent runup for many cryptos could indicate this.
No matter how excited investors are about bitcoin and its underlying blockchain, history suggests it won’t be enough to match lofty expectations.
When prices get this high, some investors are likely to want to start taking profits. When that happens, they sell their coins for a high price. However, all that selling starts prompting price drops. If the price drops enough, there won’t be buyers for cryptos, and the crash could leave investors who got in later with large losses.
Mind you, we’ve already witnessed multiple 80%-plus declines in bitcoin throughout its history. Extreme volatility is a given with digital currencies like bitcoin, and history would suggest that a significant downside from its current price is a near certainty as well.
18. You don’t have a robust portfolio yet, You put too much of your portfolio into crypto.
You might not have a robust investment portfolio yet, so it might not make sense to buy into something like crypto, which is such a new asset class. When creating an asset allocation for your portfolio, you might want to limit your alternative assets to 10% to 20% of the total portfolio value.
Others might be more comfortable allocating a lower percentage to alternatives. For example, I like to keep my alternative investments to about 8% to 10% of my portfolio. That encompasses all of my alternatives, including crypto.
If you haven’t built a solid core portfolio of more traditional assets, it might make sense to bulk up a little bit before adding riskier alternatives like cryptocurrencies.
If you want to add another crypto to your portfolio, take a step back and consider how much of your portfolio is already invested in cryptos. For example, about 5% of my portfolio is in various cryptocurrencies. I am unlikely to invest in another crypto unless I sell something first in order to maintain an asset allocation I’m comfortable with.
When too much of your portfolio is in crypto, you run the risk of losing more than you can afford to if the bubble bursts or price volatility catches up with you.
19. It’s not supported by the banking system.
So far, cryptos still aren’t widely supported by the banking system. That means you have to go outside these regulated channels in order to perform crypto-based transactions. While some exchanges are issuing credit cards that offer crypto rewards or debit cards that allow you access to your coins, the reality is the banking system isn’t there yet.
Some banks do use the underlying blockchain technology for payments, but these payments aren’t necessarily made with popular cryptocurrencies. Instead, the underlying technology is being used to improve their own banking ecosystems.
20. The market is crowded with made-up currencies.
While some cryptocurrencies, like Bitcoin and Ethereum, have made their way into widespread consciousness, there are still plenty of other made-up currencies. In fact, there are more than 5,900 cryptocurrencies as of July 2021.
This makes it hard to tell which currency will catch on. One of the surprising facts about cryptocurrency is that some of them, like Dogecoin, were started as jokes but then saw their price skyrocket before dropping lower. Trying to work out which cryptos will take off and have staying power can be difficult — and you could lose money before it’s over.
What to do if you still want to invest in crypto
There’s nothing wrong with wanting to invest in crypto if it’s interesting to you. In fact, it could be a way to provide a little extra growth for your portfolio, as long as you have the risk tolerance for it. But before you get started, make sure you only use money that you can afford to lose.
Here are some other tips to help you get started if you want to invest in cryptocurrencies:
Start by learning about cryptocurrencies and how they work. A big thing to know about how to invest money is that it’s important to be careful and understand what you’re getting into. Find out what’s available and learn about the underlying technology. For example, one reason I have Ethereum is its underlying utility in executing smart contracts and its ecosystem for building online apps.
Educate yourself on the risks as well. As with any investment, you could potentially lose money, so understanding the main risks and learning about your own tolerance could help you make better decisions when investing in cryptocurrency.
Check out our cryptocurrency guide for beginners
Check out the guide to cryptocurrency for beginners can help you learn more about how cryptos work and what you should know before you start investing. It offers step-by-step information about how to buy cryptocurrency, how you can set up a digital wallet, and how to move forward with making decisions that fit your own portfolio goals and strategy.
Sign up for an exchange like Coinbase or Gemini
If you’re interested in owning cryptos and buying them, as well as exchanging your cryptos for others, you can sign up for an exchange like Coinbase, Kraken, or Gemini. With these exchanges, you can easily buy coins with fiat currency and then hold them to see if they’ll grow in value or even exchange them directly for other coins.
Investing in crypto can be an exciting way to boost your portfolio and make some money. However, before you risk any of your hard-earned money on crypto, do your research and ensure that you have the tolerance for this type of investing.