Though the rise and fall of cryptocurrencies is part of a relatively new phenomenon, its a full decade since bitcoin was launched on an unsuspecting world. What have we learned in that time?
My first lesson is that its all based on the largely incomprehensible blockchain technology that almost nobody understands, and blockchain is a neat solution thats still looking for a genuine problem to solve.
The thing is, bitcoin is pretty much useless as a currency.
Currency
The intention was to create a currency system thats independent of any central controller, like banks, which could be used as a payments system with nobody creaming charges off the top. But whos actually using it as a currency?
Cryptocurrency enthusiasts will tell you its booming and point to all sorts of novel ways in which it can be used. Did you know you can even use it to buy gift cards that can be used in shops that dont take bitcoin? You know, like the way you can just use money?
A number of retailers will accept bitcoin, but actual sales volumes are tiny, with the true scale masked by the volumes of speculative investment transactions.
The uselessness is largely down to volatility. How does saving a tiny cost on a transaction help, when the value of the thing itself is gyrating wildly?
No, whatever faults it has, the banking system actually provides a very efficient payments system and competition really is keeping transaction costs down.
Investment
Bitcoin is pretty useless as an investment, too. Unless by investment you mean gambling, because thats all it is. Unlike publicly quoted companies providing real goods and services which can be valued in a rational manner, bitcoin has no rational underlying value whatsoever. Its worth only what the next gambler will pay for it, be that the few dollars around the start, the peak value of over $19,000 in 2017, or todays price of $6,200.
Its a bit like gold in that respect, though a lot more volatile and gold isnt a very good currency either.
No, bitcoin and all the other hordes of cryptocurrencies, as an investment, are nothing more than a fad, a bubble. And if it hasnt completely deflated yet, Im convinced it will.
Regulation
The almost daily initial coin offerings we hear of bring me to the massive potential for fraud, and thats something Ive written about previously. Even though conventional finance is heavily regulated, investment fraud is still rife and the potential in an almost entirely unregulated system is close to unlimited.
Thats changing, and I can see heavier and heavier regulation of cryptocurrencies in the future. And despite the somewhat anarchic motivations of many followers, I rate regulation as a very good thing. Can you imagine the scale of the banking crisis had the industry been based around unregulated cryptocurrencies rather than government-controlled money systems?
Crooks
Thats another sad lesson that crooks with their scams, their phishing, their Ponzi schemes theyll always be in the vanguard of new financial developments, and the honest regulators will take time to catch up.
There will certainly be genuinely beneficial applications for blockchain technology, but theyre still a long way off. And I cant see it replacing centralised financial systems in my lifetime.
Do you want to retire early and give up the rat race to enjoy the rest of your life? Of course you do, and to help you accomplish this goal, the Motley Fool has put together this free report titled “The Foolish Guide To Financial Independence”, which is packed full of wealth-creating tips as well as ideas for your money.
The report is entirely free and available for download today, so if you’re interested in exiting the rat race and achieving financial independence, click here to download the report. What have you got to lose?