Bitcoin Love vs. Bitcoin Hate (and What That Means for Your Wallet)

While the iconic sitcom "Friends" was never a favorite of mine, whenever the reruns come on TV I do get a chuckle. Don't we all?

One of the funnier episodes, "The One with the List," comes early in the show, in the second season, where Ross has to make the almost impossible decision between Julie, his current girlfriend, and Rachel, his longtime secret crush who he's just found out also has a secret crush on him. (Oh, the drama.)

Ever the problem-solver, Ross decides to make a list of Rachel and Julie's respective pros and cons. Rachel has lots of cons: too into her looks, thick ankles, and "just a waitress."

Julie has plenty of pros: smart, driven, a paleontologist, and cute. She has only one con: "She's not Rachel."

Unfortunately for Ross (but hardly surprisingly), he soon finds himself without either girl - but with a very important life lesson learned: don't make lists about who to date. (Or, you know, don't live in a sitcom.)

In the spirit of that episode, I present to you my latest Bitcoin installment: "The One with the List." Let me take a swing at listing the pros and cons of the Bitcoin currency as it stands... and get started directing you towards some profit recommendations.

Bitcoin Cons: What the Haters Are Saying

Full disclosure here: I don't entirely believe many of these "cons." Let me show you where I agree and disagree (and do a bit of debunking).

"Bitcoin is not a currency because it doesn't meet one or more of the characteristics of the definition."

Classic economics says that money is:

  • A medium of exchange
  • A unit of accounting
  • A store of value

Bitcoin has been widely employed as a medium of exchange, and this doesn't seem to be slowing. However, Buffett famously said in a CNBC interview years ago that Bitcoin "is not a currency" because "it is not a durable means of exchange." He followed that up with saying he "wouldn't be surprised if it [Bitcoin] wasn't around in the next 10 to 20 years."

Far be it from me to disagree with the Oracle of Omaha. However, our time horizons may differ a bit here. I would add that in the near term, Bitcoin has proven quite robust, surviving the failure of its then-largest third-party exchange, MtGox, which lost $400 million in bitcoin in 2014, and the January 2018 cyber theft of $523 million worth of a different digital currency.

"Bitcoin owners have suffered through security breaches and have lost money."

That's true - as I mentioned above - though this is an issue with exchanges and not the central Bitcoin/cyber currency blockchain infrastructure. (We talked above about the wallets or exchange that lost almost $1 billion in cyber currency.) Still, the losses have been from the Bitcoin ecosystem, even if they weren't through the Bitcoin algorithms.

On the other hand, it's a good thing there has never been widespread credit card fraud... oh, wait. Even good corporate citizens like Target show that almost all forms of transactions have vulnerabilities. And while it's somewhat of an apples-to-oranges comparison, credit fraud in 2017 was $7.7 billion, putting the cyber currency issues into perspective.

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Bottom line - I think that Bitcoin will be judged by history as contributing a revolutionary leap in transaction security, whether it survives as the top dog or not.

"The wide speculative price swings make it tough to value."

Fair enough. But I'm not too keen on the price stability of Argentinian pesos, either. Because current exchange costs are relatively high, merchants can't immediately turn any purchase into dollars or euros or whatever to reduce volatility risk. Bottom line - this will continue to be a problem for cyber currencies that will wane as the currency matures.

"Bitcoins have no intrinsic value."

On this one I have to disagree. I believe the sophistication and efficacy of the security algorithms, combined with the vast network of peer-to-peer computing power that enforces those algorithms, create an infrastructure that does lend intrinsic value to bitcoins. The ability to transact securely and instantly with low or no fees alone lends intrinsic value to the system. However, one could argue that this is a tenuous trust and that tactics like mass collusion could undermine this foundation. So far, it looks like the internal security features have worked in a very robust way.

"The privacy features mean that law enforcement agencies can't track illegal activity."

This is a tough one to overcome, but not entirely true. Bitcoin has been an alleged component of drug trafficking and money laundering cases. But as venture capitalist Marc Andreesen said in a well-written New York Times article, Bitcoin is pseudonymous, not anonymous. It can be tracked, but not nearly as easily as bank transactions.

Perhaps worst still, the multiple central banks have issued warnings specifically about Bitcoin being used for terrorist funding. Unless the world's crime enforcement agencies are sandbagging on this issue, it will still be an important one for Bitcoin and other digital currency ventures to address.

"The same privacy features make taxation enforcement difficult to impossible."

If the previous point about drug trafficking, money laundering, and terrorist funding wasn't enough to get most governments' undies in a bundle, this one sure will. The bottom line for me is that the privacy issue will be the Achilles' heel of Bitcoin. Governments can't support or even stand aside and watch any transaction platform that can't be taxed or policed for rule of law violations.

And now, some equal time for the Bitcoin positives...

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Bitcoin Pros: Some Love for Bitcoin's Best Assets

We'll start with the obvious:

  • Low transaction friction
  • Almost instantaneous
  • Low to no coin-to-coin transaction fees

Bottom line: these are Bitcoin's strongest edges, and why digital currency as a concept will eventually be a global commerce winner. Imagine a vendor of low-priced items, who might make about a 5% margin, being able to double his or her margins just by eliminating the current 2.5% (or more) fee that banks and credit card companies collectively charge to move money digitally. This is the real holy grail of digital currency. Bitcoin could also become an amazing tool for the world's poor by helping them send money and make financial transactions that are prohibited under current transactional structures.

In addition, speculators have to be keenly aware of the cost of changing bitcoins into U.S. dollars or euros or whatever paper currency you trade in. These costs have been coming down and will continue to do so. But caveat emptor - make sure you understand your wallet or exchange's fees structure!

Anonymity and privacy

Governments and courts can't seize what they can't find. Anti-government activists really like this part. Aside from conspiracy theories and end-of-the-world scenarios, it's tough to say these privacy plusses outweigh the negatives of facilitating illegal activities, terrorism, and tax avoidance. The bottom line is winners in the digital currency game will find a way to satisfy societal needs to limit illegal activities and facilitate reasonable taxation enforcement. Any virtual currency that flunks this test will be a niche player at best.

Security

Since each Bitcoin transaction can be unique (eventually, all of them will be done this way), a bitcoin is almost exactly like cash: The owner owns it, and the giver cannot get it back by asking a bank or a credit card company to do a chargeback. This eliminates fraud at the personal level. The most someone with ill intent can do is steal one transaction, not a string of future ones like they can in credit card fraud. On a crypto-coolness level, Bitcoin has developed a security protocol that makes Bitcoin transactions a major innovation in the ability to transfer property to another user of the Internet in a safe and secure manner.

Inflation hedge

Since only a limited number of bitcoins will be made, this will theoretically avoid the problem of overprinting. With limited supply, if demand escalates faster, bitcoins could conceivably appreciate significantly over time. However, we've already seen one split into "Bitcoin Cash," so there may be some subtle and not-so-subtle ways to overcome this coin limitation in the future.

When I look at all the pros and cons, I conclude that Bitcoin, if it keeps to its current mandate, will be remembered as a hugely innovative step on the journey to the mass use and acceptance of digital currency. The leaps made in cryptography alone are very valuable intellectual property. There may be a way for Bitcoin to morph and make itself acceptable to central bankers and governments, and also to reconcile a finite supply in an expanding global economy. And when it does, it (or some other cyber currency) has a path to becoming an even bigger financial disrupter than it already is.

With the conceptual issues realized, Bitcoin does have some major advantages to dominate in the digital currency race. For example, Bitcoin already has a well-established platform and network. If this first-mover advantage grows, challengers will have an increasingly difficult time overcoming the existing network's inertia. And lastly, it has the undeniable name recognition that is typically granted to first-movers.

But is it the best coin to trade and invest in?

Bitcoin and Its Relationship to Investing and Trading

Let's address the obvious question of using Bitcoin as a vehicle for speculation. With the volatility in this market, it certainly has the characteristics that one could use for speculation. There is also adequate liquidity. However, the exchanges are the current weak link, as Mt. Gox and Coincheck have shown. So if you choose to speculate in Bitcoin, do so using the caution and position size you would with any other unregulated speculative instrument. Also be aware of transaction costs for trades. Competition has not yet driven them down to the levels of pure trading vehicles.

A longer-term play would be to uncover some of the companies that will likely win in the coming move to digital currency. We'll dig deeper into that concept in a future article.

And lastly, as a buy-and-hold instrument, Bitcoin may be the Microsoft of the cyber currency world. A more solid foundation but more limited upside growth is found there. Other, newer coins hold much more upside, but also more risk. So be sure that you have good information and guidance about any coin you're considering.

Because of the relevance of cyber currencies in the trading and investing world, we'll be revisiting this topic with some frequency in the future.

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The post Bitcoin Love vs. Bitcoin Hate (and What That Means for Your Wallet) appeared first on 10-Minute Millionaire.

About the Author

D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.

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