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The Cryptocurrency market and its flaws

Do you regret not having invested in Bitcoin some 9 years ago? Nobody could have ever predicted the incredible growth of Bitcoin. Cryptocurrencies are not supported by Governments, yet the total market capitalisation of cryptocurrencies reached a staggering $600 Billion in December 2017.

But what is a cryptocurrency?

A cryptocurrency is a digital asset designed to work as a medium of exchange that uses cryptography to secure transactions to control the creation of new additional units and to verify transactions.

The first cryptocurrency, Bitcoin was created in January 2009 when it was rumoured that a person by the name Satoshi Nakamoto applied the bitcoin software as open source code.IInformation about Nakamoto remains unknown and some believe that he might not even exist. Nevertheless, the Bitcoin network officially came online when Satoshi Nakamoto “mined” the very first Bitcoin using the so-called block on the chain technology known as the Genesis block.

During the following year, the highest price attained by Bitcoin was $0.39 but from 2010 onwards the value of Bitcoin sky-rocketed multiplying 879,999 times with 1 Bitcoin being worth in the order of $9405 or R108 802 on 26 February 2018.

With all the excitement of the public wanting to become overnight millionaires, people rushed to buy Bitcoin.  The value of Bitcoin has increased exponentially due to the increasing demand for it and the limited supply of only 21 Million Bitcoins world-wide.

The importance of the cryptocurrency market should therefore not be underestimated as at 27 January 2018 there were 9 cryptocurrencies with market capatilisation of more than $8.4 Billion each with the top 4 being Bitcoin ($191 Billion), Ethereum ($105 Billion), Ripple ($48 Billion) and Bitcoin Cash ($27 Billion), respectively.

People are investing in it because they believe that it will eventually replace money as we know it.

This belief is still to be proved as Bitcoin is not backed by anything of intrinsic value. Many opponents and skeptics of cryptocurrencies exist, such as US investment guru, Warren Buffet who believes cryptocurrencies are inherently flawed.

Nevertheless, once invested or planning to invest in a cryptocurrency, one should be vigilant of schemes in the name of Bitcoin or any other cryptocurrency such as Bitcoin mining which is assuring a fixed return on investment in the scheme. This is false information as it is not possible to secure a fixed term return on any Bitcoin or crytocurrency scheme. The only profit that is possible is if there is an increase on the daily trading price.  

As it stands now, one can invest any amount in a cryptocurrency, however on any day, if the value has increased, only a small net profit. After paying a service fee, can be physically realised by selling the pre-set amount of cryptocurrency that is allowed.

This implies that investing in Bitcoin or any other cryptocurrency means making your investment less liquid as there is a daily limit on what you are allowed to sell. The current limit is the equivalent US dollars equal to R15 000 per day. As long as this rule is in force, it will inhibit the serious cryptocurrency investor to benefit from a sudden leap in the price through selling his or her entire crypto investment holding at once.

The amazing technology behind Bitcoin that is making anonymous payments possible and completely cutting out the bank network made it one of the most innovative ideas in the last decade. With all the success Bitcoin has had, it is facing many challenges with Governments all over the world looking at regulating all cryptocurrencies. A good example is China that has taken the lead by completely blocking foreign crypto exchange markets.  

An important challenge for is the difficulty to track payments in any cryptocurrency. This makes it hard for Police and Governments to track the flow of funds to and from criminal activities making it easier for such underground activities to proliferate. In this category are operators in the black markets or Dark Web such as Silk Road where transactions are anonymous and settled via crytocurrency transfers.

The most recent concerning aspects about cryptocurrencies are its connection to new scams and networking marketing mining companies that are popping up especially in the United States? or all over the world claiming that they will generate thousands of dollars for persons when they invest in the big Bitcoin mining computers systems. They make it very easy to invest but extremely difficult to retrieve money out of the system and some of the scam artists are even marketing their schemes online and via seminars.

Is there a valid need for new networking marketing mining companies?

It seems true that there is a need for these companies. For example, Bitcoin records thousands of trades per minute between one individual and another and whenever Bitcoin trades are administered on the network, it is moved from one individual to the next. As some system needs to ensure that all the trades are verified and recorded appropriately they also need to double check that the ledgers are correct and all systems are matched worldwide to show the correct value of Bitcoin in the wallet of the bitcoin owner?

The servers and computers doing the mining needs to be expanded as the current servers  have a very limited lifespan between 4 – 6 months partly due to the extreme processing that needs to be done and the costs are high to maintain the server clusters besides the massive amounts of power they consume and warehouse space. The need for new mining companies with more powerful servers are created as this process of transactions is not captured by companies like banks or businesses familiar to us. The transactions are done by computers and server networks all over the world that are all connected and work online to accomplish this.

Although the argument by cryptocurrencies creators for introducing increasingly stronger servers make sense, our view is that this problem should not become the investors’ problem to get involved in the financial support of administrative systems to ensure the administrative upkeep of a currency. Simply put, governments do not approach public to fund the administrative side of creating and maintaining their currencies, viz. the cost of design, the cost of materials, the stamping of coins and the printing of notes and distribution thereof. That is governments’ own problems and the same principle should apply to the creators of cryptocurrencies as well.

Mining a Bitcoin or any other cryptocurrency basically means being the middle man in the form of a computer that complete the transactions and takes a small cut for doing this.

Caution should be taken when trading cryptocurrencies and willy-nilly investment into any mining opportunity online would be unwise.  Because many of these mining companies and crypto trading website are getting hacked, you need to do proper research before you start and when you do buy Bitcoin rather do some research to store it in a hardware wallet on your pc or with a well-known computer service provider.

There is a growing problem where more and more quacks who brand themselves as entrepreneurs, network marketing professionals, investment advisors and wealth gurus are pushing their Bitcoin mining plan onto easily influenced followers that are looking to make more money and even make their retirement dream come true. It is believed that most of these Bitcoin mining schemes are none other than ponzi schemes disguised as bitcoin mining. Most of these scammers also claim that they are legitimate as they own a real bitcoin mine.

All these parasitic schemes need people to invest so most of these schemes encourage Bitcoin holders to re-invest from 35% to 100% of their Bitcoin mined earnings back into the system. This is a very bad Bitcoin investment advice.  

Finally, I would advise that if you have Bitcoins in your wallet do not fall prey to any of these Bitcoin mining schemes.

Bitcoin is truly unique and in time it might just transform the way we trade or shop. But in the meantime the question will remain? Will it keep its value and continue its phenomenal growth or would you rather invest in something of true intrinsic value such as gold or platinum.

I know what we intend doing once the price of our small Bitcoin holdings have sufficiently recovered to enable a small profit. We will sell and invest in a commodity with a true intrinsic value.