Bitcoin and all other cryptos have almost outlived their purpose. It doesn’t mean it is not profitable. But it is not serving the purpose for which it was created.
From the unknown creators of the world’s first crypto currency, Bitcoin, its main purpose for creation was to eradicate transactional cost. The irony of the matter then is, if Bitcoin was created to curb transactional cost, in essence it was created to replace paper money or fiat. Over the years, the narratives that have revolved around Bitcoin and other crypto currencies is that it is not controlled by any central authority, and hence allows for uncontrolled and untraceable money transfers without any charges.
The scam that is going on right now is something that was designed to be used as a currency is being used as an investment vehicle. Now why do you create “money” (Bitcoin) and keep it to change it back into money (Fiat) when the perceived value of the crypto increases?
All these coins are perfect storm for manipulations. In 1980’s, we had what was called “blind pools”. Blind pools were used to create the biggest scams ever. Blind pools were stock offerings with no stated investment goals for the funds that are raised from investor. And that’s what all these coins are. With the blind pool era, what happened was you raised money from investors, and you issued them with a paper. And there is a limited amount and so it’s finite. This paper becomes so valuable at hand but worthless in real sense. A promise is usually made to investors that someday, it will be worth something more and they can sell it for a massive return, but this never happens.
But the point about crypto’s is, money is being raised and value is being created but there is nothing behind it. All that is happening in the Crypto market it, they are just running on scarcity to increase or inflate prices and that model is not going to work forever. Crypto currency is a classic means for a pump and dump agenda by its perpetrators. In the stock market, pump and dump is a scheme that attempts to boost the price of a stocks through recommendations based on false, misleading or greatly exaggerated statements. The perpetrators of this scheme, who already have an established position in the company’s stock, sell their positions after the hype has led to a higher share price. This practice is illegal based on securities law and can lead to heavy fine.
A major factor that made crypto currency gain its popularity among the masses in the fourth quarter of 2017 is what is termed as media circus or media frenzy. Media circus or media frenzy is a colloquial metaphor or idiom describing a news event where the level of media coverage – measured by such factors as number of reporters at the scene and the amount of materials broadcast or published – is perceived to be excessive or out of proportion to the event being covered (Wikipedia). The excessive hype and testimonies that flooded the internet about gains and returns made in cryptos also contributed majorly in driving prices beyond normal.
Crypto currencies in themselves is not a scam. But there are scams being perpetrated around them that are very dangerous for people that don’t know better. To the average person who has never been through this before, you are just going to get caught up in the hype and it’s going to cost you all your life savings. The amusing part of all this is, if crypto currency is done or crushed, the people that’ll get hurt the most are not the bigger corporations but the little peoples, what we call the retail traders.
Bitcoin, the mother of crypto currencies is no more useful at $15,000 than it is at $50. Whether it is a $50 or $15,000 you can still use Bitcoin as a currency. Because you can divide it up a million times. The only reason it is running up is because it is not being used as a currency anymore, but rather a wild speculation. While “newbies” are patiently waiting for a dip to jump of the wagon, others who have short it keeps rejoicing over its fall and the majority who went long, I am sure would like to bury their heads into the ground now.
There is two sides to every equation when you come to anything that is trading publicly. And that constitute the market capitalization, which in Bitcoin stands around $200Billion. But that’s actually irrelevant. All that matters when something is trading, is what’s called the float. Float simply means “how much of an item that is actually out there being bought and sold”. In the case of Bitcoin, almost all of it is being locked away and is not trading. So if there is $200Billion in total market capitalization, there is $10Million, the most, out there actually being traded. When you have a very thin market float like that, it’s very easy to manipulate the market. What happens is, once you buy Bitcoin it’s not so easy to sell it. So it keeps getting thinner and thinner which is what accounts for this wild swings.
My concern is people are putting more than half of their life savings into crypto currencies thinking this is the way out and like “here is how I want to become a millionaire or a zillionaire, whatever. The real truth is, you might very well become one if you can figure out when to get out. Then again, the question is “when are you going to get out”?
“Bulls make money. Bears make money. Pigs get slaughtered.”
The author is Financial Trader (GSE, CGIA-member, CFA-member)