The 3 Downsides of Bitcoin that No One is Talking About

I’m a believer in digital currency. A decentralized currency built on a completely autonomous ledger system is a dream come true. It truly is the democratization of money.

Just last week, I wrote a short thesis on how I approach Bitcoin, and how I include it into my investment portfolio. I’m a fan of Bitcoin and I hope it will revolutionize money and create a better society for us all.

Bitcoin is getting a lot of hype right now and it’s a very exciting time for crypto currency.

But in this article, I want to remind everyone about some problems within the Bitcoin market and some possible solutions to help us become more savvy investors and build better financial futures for ourselves.

1. Bitcoin has no value outside of speculation

The only thing that makes Bitcoin valuable is that people think it’s valuable. The more people talk about how valuable it is, the more valuable it becomes.

Bitcoin could easily be compared to tulip bubble of the 17th century.

There is nothing intrinsically valuable about Bitcoin. The only reason why Bitcoin increases or decreases in value is because the collective consciousness of society decides on what they think future value of Bitcoin will be.

There are many ways that Bitcoin can have amazing positive effects on the world, but as of right now, that hasn’t happened. Bitcoin is, by definition, useless.

Trading Bitcoin is no different than trading imaginary paper because you think that tomorrow someone will buy your piece of imaginary paper for more than you bought it today.

I read a lot of crypto newsletters and I am just as excited about the future of digital currency as the next person. But we need to come clean about the fact that Bitcoin has no use. It’s not a commodity. You can’t eat it and you can’t build anything with it.

I believe the “saving grace” of Bitcoin is how easily it can cross government lines, which means it can be a miraculous tool to bring third world countries out of poverty or fund venture startups in countries like Nigeria where there are currency problems.

But that hasn’t happened yet and I don’t see any evidence that this will happen soon.

So far, Bitcoin serves no purpose other than to trade and the hedge against inflation.

Which brings me to my next point.

2. You can’t celebrate its decentralization if you don’t use it

Bitcoin is celebrated for one reason above all other reasons.

Bitcoin is decentralized, which means it is “transacted” on a blockchain.

What is a blockchain you ask?

It’s an essential chassis that services as the “ledger” to ensure Bitcoin can be verified as legitimate and irreplaceable. More or less, this means that Bitcoin is not connected to any kind of government or private entity that can manipulate the currency.

Sounds awesome, right? It is awesome! It’s ground breaking.

With Blockchain, the people can transact Bitcoin without dealing with a middle man and without private entities such as the federal reserve manipulating the value of currency to compensate for inflation.

But here’s the problem. We can’t actually celebrate the decentralization of Bitcoin until we use it in a manner that is congruent with how we live our lives. Until Bitcoin starts behaving like an actual currency, it will only ever be a speculative asset class.

Until that happens, the government is still an integral part of managing the U.S. and world economies. One of the reasons we like Bitcoin so much is because it is a currency that allows us to transact without the government getting in our business. But until we start buying houses, paying taxes, supporting local businesses, buying stocks or buying concert tickets with Bitcoin, celebrating the fact that it’s decentralized is a moot point.

In order for Bitcoin to have the real world applications that much of the market hype is celebrating, we need to start using it in the same way we use the dollar.

Personally, I don’t see a reality where people use Bitcoin to pump their gas. At least not in the next 10 years.

Note from the author:

I wrote this article last night and as always, I gave it a day so I can come back and edit it with a fresh perspective. Over night, the CEO of Paypal made an interesting announcement that could potentially bring us closer to using Bitcoin in real world applications.

But we're still a long ways away.

Watch the video below.

https://twitter.com/APompliano/status/1330922848425308160

3. There is a very real risk of people losing their money investing in Bitcoin

I made a lot of money from Bitcoin, but the only reason why I was able to do that was because I bought a few thousands dollars worth of Bitcoin in 2015 and then I got lucky. I cashed out at just the right time.

I did it out of fear. I saw how much money was in my Coinbase account and the thought of losing it gave me heart palpitations. So I sold all my Bitcoin and then I watched as all my friends took losses on Bitcoin and Ether for the next 3 months.

I timed it perfectly. I got lucky. Plain and simple.

The reality is that anyone who makes money from timing the market did so because they got lucky. I’m not saying that out of arrogance or jealousy, it’s simply a fact. It’s impossible to predict the market and therefore it’s impossible to time the market.

This reality also applies to Bitcoin.

The vast majority of people who are buying Bitcoin will lose their money. The reason is because most people are buying Bitcoin on emotion. The Robinhood app, the seemingly endless bull market, and fear of inflation have created a perfect storm for Bitcoin speculation.

The stimulus package is creating an emotional reaction and so smart investors are buying Bitcoin to hedge against the U.S. dollar. The problem is that the average 19 year old is seeing this new age digital money increasing in value and is scared that he/she will “miss out on the opportunity of a lifetime.”

I think this is very dangerous, and I think we should be addressing the risks just as much as we are celebrating the growth.

I can’t predict the future. I’m not telling you that Bitcoin is going to crash. What I will tell you is that it has crashed before and there’s no reason to think that it won’t crash again.

We’ve already accounted for the fact that Bitcoin is an asset class that is built purely on speculation. So when it does crash, past behavior predicts that most people will sell when it’s low and then call it a loss and call it a scam.

In addition, there is also a doubtful, but very real possibility that the entire Bitcoin market could collapse. Just like the .com bubble, just like the real estate bubble.

Bubble’s burst, it’s just what they do.

In Conclusion

To say again, I'm on team Bitcoin and I am excited about the potential of digital currencies in the future.

But it will be years before Bitcoin infuses itself into society. As of right now, it's nothing but a speculative asset.

For young investors, I 100% recommended treating the stock market as your main place of wealth creation.

Over the next 5 years, it's reasonable to think that Bitcoin will be the best performing asset class there is. But over the next 20 years, my prediction is that the stock market will continue to generate more wealth than Bitcoin.