Bitcoin, a highly speculative investment. Beware of financial bubbles

Bitcoin, a highly speculative investment. Beware of financial bubbles

With the price of the bitcoin hit record high beyond $10,000, more and more people who are considering investing in currencies crypto (cryptocurrency). A surge in the price not long ago, however, carry the risk of unusually large. Investors should be prepared to face the possibility that they could lose their entire investment.

Bitcoin launched in 2008 by a person with the pseudonym Satoshi Nakamoto as means of transactions among the participants without the need for an intermediary. Since the beginning of 2017, rising price bitcoin 1300% when more and more consumers come in droves brought hope will bear the increase in popularity of profit and an increase in the value of bitcoin-related.

Currency is not actually crypto altogether. As explained the Financial Times, bitcoin is a series of computer code, and that means that new bitcoin can be created — up to an agreed limit — by a computer that had the right to do that with an intricate puzzle solving. Transactions are recorded in a database called blockchain.

Bitcoin, exactly in other assets such as gold, not bring in revenue. You should sell them to realize the value of anything. And, like gold and other currencies, bitcoin can be transferred in peer-to-peer.

Part of the worry is bitcoin is concerned, along with various another cryptocurrency, he sued the traditional role of the bank and the central bank. In the classical world, the bank acts as an intermediary by providing loans of deposits that they save and funding from the central bank. The Central Bank uses interest rates to the availability of funds as the Jack to guarantee price stability. The enactment of the cryptocurrency threatens this model because the bank no longer needed to chaining the funds and there are no central banks that guarantee price stability.

Fear-fear closer on bitcoin revolves around the dramatic increase in value not long ago. There is anxiety in the market that a sudden collapse may already be waiting for following the fall of the currency that Crypto is more than $1,300 in a matter of minutes in bursa bitcoin Bitfinex. Bitcoin recovered to the level above the $10,800.

The sudden collapse that echoed the warning that had long been delivered that party bitcoin is set to end in a puddle of tears. Most recently, Jamie Dimon, CEO of JPMorgan, one of the world's largest investment bank, said it will fire any employees who trade the bitcoin because acting stupid.

In a highly unusual Alliance, his words echoed by Nobel Economics Laureate Joseph Stiglitz, a step further by argues that bitcoin:

should be banned.

All of that is a clear cue that professionals do not trust promises the enthusiast of crypto.

Blockchain factor

There is no doubt that Bitcoin — and particularly blockchain, the technology behind it — potentially revolutionize the financial services industry.

A blockchain serves as a great book digital transactions transparent and economy cannot be in common sense, recorded in chronological order, which operates on a peer-to-peer.

Basically, the technology allows the occurrence of exchange value in the neighborhood along with interests conflicting with no need for a trusted intermediary. It is just by removing the need for banking or financial services company that runs the role of mediation of it.

The use of technology is not limited to financial transactions. Almost all of the value could be listed on the blockchain.

But no matter how beneficial the underlying technology blockchain m2, or whatever it be applied, there is a risk of a real and substantial risk in the bitcoin.

Volatility versus profit

The first risk is, and this is the most significant, compared to any currency — the stock, or gold — bitcoin very volatile aka unstable. Bitcoin volatility against the U.S. dollar is almost six times the volatility of the Rand (South Africa's currency) against the U.S. dollar. Although this joyful in good times, it is potentially devastating to investors in tough times.

When professional investors decide which assets must be mastered, they see the profits and the volatility of the underlying asset. Only investors with good taste against risks that are willing to invest in risky assets and volatile. Usually, they are financial professionals who are working in, for example, a large investment bank or hedge fund.
Investors with a taste of risks (risk appetite) like lower asset managers or pension funds, preferred asset with somewhat lower profits but not so volatile.

The practical rule is an investor and is directly proportional to the volatility of the asset in which he invests. But in the matter of the bitcoin rule of thumb does not apply. The more the only private investors who flocked to approach the "Exchange" the mushrooming bitcoin on the internet and advertised aggressively on social media.


There is a great risk that bitcoin been overstated.

Practical use cases bitcoin is actually limited. Bitcoin transactions that did not allow the adequate per second of it to be used as a substitute for a modern payment system. Bitcoin also does not offer any functions other than transaction pseudonym — identity transactions the parties truly have hidden.

Bitcoin favored by scheme-pyramid schemes, including the pyramid scheme MMM in Nigeria's famous leaning reputable it is. In a current article, Financial Times called bitcoin itself is a pyramid scheme, a statement very disappointing the enthusiast of crypto. (A pyramid scheme is usually an illegal operation in which the participants pay to join and benefit mainly from payments made subsequent participants. If there are no new people who enter, that plan collapsed.)

Regulatory risk

The risk of a third, and perhaps the most notable is the risk of the regulation. In September 2017, the Chinese Government forbids the exchange of bitcoin in mainland China, which caused the price of bitcoin loss.

Although bitcoin claimed as a "global currency", the reality is 58% of the entire mining bitcoin takes place in China. If the Chinese Government decided to consider mining bitcoin illegal, chances are the price will plunge.

Other countries also voiced concerns. Not long ago the Central Bank of Russia issued a warning to investors about the risks of investment currency crypto, citing concerns about a bubble. This indicates that there may be an effort coordinated act.

The currency of India banned in crypto because its use is a violation of foreign exchange rules. Australia's Central Bank, the Reserve Bank of Australia is a different approach. The Central Bank is monitoring the currency market crypto in an attempt to understand the underlying technology.

The South African Reserve Bank revealed an openness against the blockchain technology. But the financial authorities also highlighted the potential risk for the customer.

Classic bubble

There is a real risk that is not fully understood by many clients who invest in currencies crypto. A variety of ads promising that bitcoin can make you rich quick. And social media is full of stories about friends neighbors or distant cousins who have scooped up lots of money through the bitcoin.

No doubt, the cases were real, and those who invest early could reap a big profit. But that's what happens in any bubbles — from dotcom bubble until the tulip mania. It also happens in any pyramid scheme.

As usual, investors need to be very vigilant with schemes that promise quick profit.

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