Bitcoin: Volatility Without Recourse

I like to keep my money digitally, in fact I have a distinct dislike for physical cash. Luckily I just about never carry any cash thanks to how well established debit/credit cards are in Sweden. However, I am not a fan of alternative ‘currencies’ such as bitcoin. Sure, it is digital, but it is also terrible in just about every other respect.

I guess most of my dislike stems from the fans of bitcoin, whom all sound like boiler-room pump and dump salesmen. Bitcoin is terribly suited as a currency in its current state, it is quite frankly too volatile, too harsh on consumers and quasi-deflationary.

Bitcoin exchange rate, 1 year

Bitcoin exchange rate, 1 year, from coinbase.com

The price of bitcoin has been volatile over the last year to say the least. It was at one point worth over $1000 per bitcoin but the price is at the time of writing at $325 per bitcoin. Not a terribly good investment from those who bought in at $1000. We should not kid ourselves either, most of the people holding bitcoin today are speculators or use bitcoin to pay for illegal activities, both alternatives aren’t exactly something that inspire confidence in a fledgling currency.

Another problem is that bitcoin is very prone to market manipulations, the volumes are small enough that a few individuals can influence the price with ease. The high exchange rate in the end of 2014 looks like a pump and dump scheme to say the least. At the same time most people could not withdraw their bitcoin or fiat currencies from the biggest exchange, MtGox, leading to an unhealthy environment where the market was non-functional for all intents and purposes.

Still, the price has made a terrific journey for the last year, but the volume of trade is still largely the same, it has increased somewhat but has in no way matched the price curve. The volume is quite simply small and insignificant at any reasonable perspective, especially when comparing to other currencies or even just trade in general.

Bitcoin transaction volume

Bitcoin transaction volume, from coinbase.com

The extreme volatility of bitcoin, in comparison to normal currencies makes it a terrible store of value and even worse for normal spending. It is a terrible speculation Ponzi scheme run by pump and dump salesmen and gold bugs who fear government backed currencies. Here is a hint; gold and bitcoin will not save you from the Rapture. Bitcoin transactions are irreversible, which in itself should disqualify as a new/better currency. Bitcoin totally lacks consumer protections and does not make it easy to keep your assets secure. Practically anyone owning bitcoin is at risk of losing it due to the slightest mistake, and without ANY recourse. That is a terrible feature in a new currency.

Want to get rich? Invest in index funds with no or very low fees. Be diverse, be long-term and for the love of god, don’t gamble with money you cannot afford to lose.

 

– P

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