Speculating About Bitcoin

I'm writing this in February 2014. It was towards the end of last year, in October, that I began to hear lots of mentions - on TV, on the internet, in the newspapers - of Bitcoin, which apparently was some sort of new 'currency' that was issued and controlled by no government, and was transmitted over the internet.

I began to read up on it. As far as I could understand, this 'money' was created by people processing and verifying the transactions that took place with the 'currency'. Governments, of course, simply create new money just by printing or minting it, or more likely by inventing new debt and then handing this debt to their country's tame central bank, which then creates new money in its computer system and hands this money over to the government to do with whatever it wants - which means, of course, spending it. After all, there's nothing politicians like more than spending other people's money. They'll extort it, steal it and borrow it so that they can keep on doing that.

The idea of a 'currency' that wasn't controlled by a government was clearly attractive, as was the notion that no debt or liability of any kind could ever be created when this new 'money' was created. Also appealing was the fact that some work had to be done for new Bitcoins to be created. Mining Bitcoins (that is, getting new ones by handling and recording the Bitcoin transactions that were taking place) was almost like having a respectable job.

As more and more publicity began to be generated in October 2013 around the Bitcoin 'phenomenon' (or should that just be 'novelty'?), my first thought was that I would mine some Bitcoins and get some for free. Unfortunately I'm not tech-savvy, so I couldn't for the life of me work out what I was meant to do. Then I realized that it didn't matter anyway because Bitcoin mining had become so competitive that you needed expensive, specialized computers to be in with any chance of getting any new 'coins'. Also there was every possibility that your electricity bill would be so high that it would completely offset the gain you made from creating new coins.

So, if I wanted Bitcoins I would have to buy them. Buy them, that is, with 'real' money. Fiat money, as they call it. Money created by governments.

“Oh, yes,” I thought. “I can see what this game is all about. Somebody creates for free some essentially worthless internet tokens and then gets mug-punters to hand over real money - US dollars, euros, yen, yuan, whatever - for the worthless tokens.”

Still, a frenzy was building up around Bitcoins, and I took the view that, at least in the short term, it was likely to be a one way bet, and I wanted to ride that winning horse.

Now, I had already had some involvement with another internet token - Ripples. With Ripples (also known by the letters XRP) the creators aim of getting money - I mean real money - is much more blatant. The creators openly say, “We've invented these internet token, we've created all the ones that will ever be created, and we've given them to ourselves and our buddies. We're telling you that we'll give some away, but otherwise we're going to flog them either for real money, or for stuff like Bitcoins that we can easily convert into real money.”

There's something refreshing about that sort of openness.

With Ripple, first you had to be given some or borrow some to open a Ripple account. Then if you wanted to get more, or you wanted to sell your Ripples for real money, you had to go through a gateway. This was just an internet exchange where you could trade real money for internet 'money' (so-called cryptocurrencies) and then keep those cryptocurrencies at the exchange or send them over the internet to some other person, which meant in practice to their cryptocurrency address. (Where cryptocurrencies are stored and transmitted to or from is often referred to as a 'wallet', but anyway all cryptocurrency at any time is either at an address or between addresses.)

Real money enters into the equation when you buy cryptocurrencies with it or sell cryptocurrencies for it. For example, I managed to get given some Ripples, which obviously were of no use to man nor beast, and I therefore wanted to sell them for real money. So I opened an account with Bitstamp, jumped through the various I.D. verification hoops, and was then able to sell the Ripples held at my ripple.com Ripple address for US dollars at Bitstamp.

So I now had real money in my Bitstamp account. All I needed to do was ask for this money to be transferred to my normal bank account, and lo and behold, a few days later real money appeared in my bank account.

Just imagine how good it would feel if you'd invented some cryptocurrency and made sure you kept tons of it for yourself and you were selling it off all the time like that.

However, the other side of the coin, so to say, is that if you want to buy a cryptocurrency like, for example, Bitcoins, you have to transfer real money from your bank account to the bank account of an exchange like Bitstamp. This obviously requires a lot of trust (or naivety) and you can of course see the risks involved. You are, after all, essentially exchanging real money for a number. That is, a number of internet tokens.

But I wanted to be part of the Bitcoin game. So I transferred money to Bitstamp, which showed up in the USD section of my Bitstamp account, and I then traded those dollars for Bitcoins.

I now had no dollars in my Bitstamp account, but there was a number there saying I had a certain quantity of Bitcoins.

Although I had decided in October 2013 to do this, with all the argy-bargy of proving I.D. and transferring money, it wasn't until some time in November that I actually ended up with my Bitcoins.

And then what happened? The Bitcoins just went up and up in value relative to the USD. I could hardly believe my good fortune when I calculated what my Bitcoins were worth in dollars. In fact it seemed too good to be true. So I sold out. But Bitcoins kept going up. So I bought back in again. At a higher price.

I think it was around the end of November and the beginning of December 2013 that things began to get rather 'leery', as we say. Volatility seemed to kick in big time. Bitcoins would drop, but I'd hold on, believing that they'd rise again. But they'd keep falling, so I'd sell out to cut my losses. Then they'd rise again, so I'd buy back in, at which point they'd decide to fall again.

I couldn't seem to call the situation right at all.

By the time we'd got through December 2013 and into January 2014, not only were my nerves frayed, but I'd lost a significant portion of the profit I'd been showing just two or three weeks after first getting involved in the Bitcoin game. I was still holding two-and-a-half times what I'd originally put in, but at one stage I'd had almost five times my original stake.

I cashed out and decided to stand on the sidelines.

And my situation now, in mid-February 2014? I'm still just watching. But the atmosphere around Bitcoins has changed significantly.

Perhaps I'm 'mis-remembering', as I believe a certain recent, intellectually challenged, American President was wont to say, but in November 2013 there was a terrific and very positive buzz around Bitcoins. They were going to change money as we knew it. They were even going to supplant the US dollar. That buzz, that enthusiasm on the part of quite a few people, was why I made money. Everyone (everyone, that is, who heard about Bitcoins and decided they wanted, for whatever reason, to be part of this brave new world, this brave new currency) poured money - real money - into buying Bitcoins. That's why the price shot up. I took some of this money and profited. That presumably means some people put money into Bitcoins and lost some of their money to people like me, just as I lost some of my money to other people when the maximum profit I had gained then dwindled to the profit that I eventually exited with. After all, it's a zero sum game.

Except, that is, for the people who create the cryptocurrencies, or the very early adopters who are able to mine new coins essentially for free (sometimes those people are one and the same) or who buy coins at what later proves to be a fraction of their eventual worth when the coins become popular and start being bought by late adopters.

But the situation now is different. The tide has turned against Bitcoin. As I write, the price, in USD, is steadily declining. Yes, it fluctuates up and down, sometimes very dramatically, but the general trend is down. Why is this? It's simple. There is no new money coming into the game.

For the price of Bitcoins to explode and rise by multiples of its present value, it would need a big inflow of dollars (or other fiat money). To accommodate this new money, because the number of Bitcoins can't be expanded (or at least not quickly and not by any great percentage) the price would have to expand. For this situation to arise there would have to be a frenzy of purchasing such as happens when a fad develops or a mania takes hold, otherwise a large new market of people would have to start buying in. In that case even if people only bought steadily and in moderate amounts each, it would still force the price of Bitcoins up sharply.

But this isn't happening. In fact the opposite is happening. What is going on now is that nations around the world are either actively opposing the use of Bitcoins, or they are warning people strongly against using them. This creates a two-pronged attack. There is the official action being taken - for example, China saying that financial institutions must not facilitate clients' purchases and sales of cryptocurrencies - and there is the ever-increasing negative publicity. The latter makes potential new users of Bitcoins not want to get involved with the cryptocurrency, and the former makes it difficult or impossible for people to get involved even if they want to.

As of today (19th February 2014) I think I have read that Russia is saying cryptocurrencies are illegal, Ukraine has warned against them, Germany has warned against them, Malaysia has come out against them, India is against them, and China is against them. Other countries are adopting a similar attitude. America is largely against cryptocurrencies, but with the attitude that they might be acceptable if they are tightly regulated and overseen, and if transactions and users are clearly identified and recorded at all times.

Now the point is this - does the world really need another 'official', regulated 'currency'? I don't see why it does. With my credit cards and debit cards I can already buy what I want over the internet, no matter what currency it is priced in. The transaction goes through straightaway. I have a record of it, as does the person I am buying from. If there is any dispute, as a last resort I can go to the provider of my debit card or credit card and take up the matter with them.

Bitcoins and other cryptocurrencies solve a problem that isn't there. People don't need it, and they won't want it.

When I first came across things like Ripples and Bitcoins, I thought several things. Firstly, I thought, they've been invented and created by clever people who hope, and intend, to make a lot of money from them. Real money.

So it might be worth inventing a cryptocurrency or getting in early on a new one.

Secondly, if cryptocurrencies aren't really needed or useful, they're just gambling tokens. Realize that they're not necessary for anything and they're not really useful for anything (or at least not for anything that you can't already do with your debit card or credit card or smart phone) and that they're just for playing with in the hope of winning back more real money than you spent creating or acquiring them, then you've probably understood pretty much what they're all about.

Thirdly, some people really are naively idealistic about cryptocurrencies. Instead of seeing them as some smart person's money-making wheeze, they really believe that they are something wonderful in their own right. Something that will bring down banks and governments and change the world.

Dream on. I suspect quite a few of the people still in the Bitcoin game fall into this idealistic category. Other people still in the game are trying to day trade the price fluctuations of Bitcoins and other cryptocurrencies. Yet other's are hoping there will be another mega-rise in the price, but they're doing so without understanding the current climate around cryptocurrencies and what would be necessary for a big price rise to take place.

It takes a relatively small amount of money to push the price of Bitcoins up from $10 to over $200, as happened in early 2013, but it would take a much greater input of money to push the price up from, say, $500 to $10,000.

A couple of final points. Apparently there are now something like a hundred cryptocurrencies around. Even Max Keiser off Russia Today has started one.

Now, he's a shrewd dude. Why not copy him and start your own cryptocurrency before the whole game fizzles out. (Everything has its day, and cryptocurrencies will too.)

How many of cryptocurrencies are going to survive? Hardly any, I'd say. If any. Some might strike it lucky and become a fad for a while. They may be pumped and dumped. But eventually nobody will want to put any real money into them, and then they'll just fizzle out and die.

But people say Bitcoin can't be banned. Of course it can't. But the authorities don't need to ban it. They just need to ban the 'gateways', the exchanges, the points at which fiat money goes into and comes out of the cryptocurrency game.

As for Bitcoins and other cryptocurrencies being anonymous, tell that to the Bitcoin users being arrested by the authorities.

Money transactions for nefarious purposes already go on, and the most popular way is by handing over some good old US dollars. In cash. And dodgy deals are done all the time all around the world, often I suspect in the guise of respectable, and even officially sanctioned, trade and business transactions.

So it would seem there really is no need for Bitcoin. Or for any other cryptocurrency.

Perhaps if Edwin Starr had turned one eye to the future and he'd wanted to sing about something other than war, he'd have sung:

Bitcoin, huh, what is it good for? Absolutely nothing.

Say it again!

Bitcoin | Cryptocurrency | Mining | Ripple | Earning Cryptocoins

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