In researching whether to buy a crypto-currency such as the popular Bitcoin. I looked at them from a pragmatic angle. My first question was how is a crypto different from a fiat currency? Can the crypto be manipulated by a group or groups of people? How safe and stable are they?
In January of 2017 Bitcoin was at $900+- . By December it was well over $19,000. now at the end of 2018 Bitcoin is at less than $4,000. My question about safe and stable was answered with the dramatic rise and fall of bitcoin. This leads me to my 2nd question, “can it be manipulated.” I am not claiming that someone or group of people or business manipulated the price of Bitcoin over the past two years. I am curious as to why such a fast run up and nearly as fast decline.
Crypto-currencies are base on Block Chain technology. A friend tried to explain the technical aspects of Block Chain to me to prove the cryptos can not be manipulated at that level. I believe him that the distributed nature of block chain makes it very hard to manipulate any currency at the server level. There are too many servers.
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So a technical hack is not likely. That leaves a social engineering approach. Any hacker will tell you the fastest and easiest way to compromise an account is to have the owner of the account give you the information. Social engineering is as old as computers. If we look at the hype given towards Crypto’s and even the Stock Market during the dot com bubble. Supposed experts were making outlandish claims of where the stock market was heading. The Nasdaq was purported to be on its way to $10,000. Shortly after passing the $5200 mark the Nasdaq dropped to nearly $1200. The financial wizards were making statements such as “Bitcoin will be worth $1,000,000 per coin.” The “Experts” were wrong. Many people bought in near the $19,000 level. Now the bitcoins have lost over $15,000 in value per coin. Maybe it will bounce back and the people will get their money back.
The possibility of Social Engineering on the cryptos is what stopped me from buying in back in 2017. If I had and I had sold out at the top I would have made a fortune. There are a lot of “ifs” in that scenario. I am glad I held off buying Bitcoins. It does appear to me that a group such as a large bank or investment firm with several million dollars at its disposal could start buying a crypto at the bottom. With the scarcity mindset of the people when the cost starts to rise they will buy in. Again the very hopeful pundents were making outlandish predictions that this crypto is going to be the one that is going to make the early adopters rich beyond their wildest dreams. The problem is often things like this take the stairs up to the top floor and then jump out the window. Leaving the majority of the people with a loss. Some of these losses are significant.
Another thing that gave me pause was when the Bitcoin Futures were announced in December of 17. Futures allows a person to bet on whether a commodity will go up or down. This made it good for large investors to place a stake in Bitcoin with out owning the coins them selves. They are betting on the move of the value of Bitcoin. A conspiracy minded person could believe in a collusion of several large entities entering the Futures market putting out a very bullish report on Bitcoins. Then the price starts to move up more people get on the band wagon the price rises faster. Now the late adopters are seeing they lost out on an opportunity so they buy in near the top of the market. All along the time the value is rising the talking heads on TV, radio, and the printed media are all saying it will continue to rise. Brokers will give it s strong buy recommendation. As with any stock when it is over sold or over bought there will be a correction. A correction could be started by the large investors selling a large block of stocks at one time. The values starts to slip and the panicky investors sell. This leads to a drop in price causing others to sell. And we have the situation of today. In just a few months the price of Bitcoin went from over $19,000 to under $4,000. This is human nature.
I do not believe there is anything inherently unlawful in a group of investors buying a limited commodity and then when the value is sufficiently high enough selling out of their positions. If several large firms collude to do this then we have a different situation.
My first question also haunted me; what is the difference between a crypto and a fiat currency? I could see only one difference it was that the originators of Bitcoin said there will be a finite number of coins minded. Similarities of the two type are both types of currencies are based on the belief of a value. There is not physical commodity such as gold, silver, platinum or any other physical item backing these currencies. They are both faith based. Cryptos are not controlled by the central banks or by governments. Some say that makes them better; other say it makes them unreliable.
I will leave it to the reader to decide are cryptos the wave of the future or just another gimmick of the financial markets. Please let me know in the comments what you think of Cryptos and whether they are the future of commerce.