Bitcoin is a cryptocurrency and worldwide payment system. It is the first decentralized digital currency as the system works without a central repository or a single administrator. Bitcoins are created as a reward for a process known as mining. I have not come up with this definition.
Since it is accepted as a medium of exchange by a fair number of buyers and sellers of products and services, and is being considered as a store of value too, it is a type of currency. I am not too sure if it is a legal tender though. Who's backing bitcoins? Where's the promise to hold it as a valid medium of payment under the legal system for meeting financial obligations? Bitcoins are not issued by the government of any country. Sure, it is a type of digital currency, because it is not a physical currency.
All major currencies are traded on the foreign currency exchanges. Bitcoins too are being traded on the digital currency exchanges. What's the big deal about it? That its price reached $10000 recently? Yeah, it is a big deal.
From nowhere the price soars to $10000 within no time. It actually has become everyone's envy. If only one had bought it in April 2011 when it was priced $1, or in June 2013 when it was $100, or in November 2015 when it was $500, or when, heck, one could go on. Little does one realize that envy does not take us anywhere; it only puts us down.
You can see the levels of greed and envy from bitcoin's price history. Yet, for those who are eternally greedy and envious, there's no need to be disheartened; the price of bitcoin is only going to go up, for $40000 price is very near as per this prediction. Volumes are going up, and prices are going up. Everyone is happy.
No, not everyone is happy; we just noted earlier that those who did not buy it are not happy. But they too can be happy if they bought at $10000 and are able to see $40000. Bitcoins are happiness quotients, aren't they?
I am not bothered by the surge in bitcoin prices. People trade in all sorts of things in life, from wood, shoes, and paintings to currencies, oil, gold, and other commodities. They trade in bonds and stocks too. These are the traders' paradise. Speculation is fine if people know that they are speculating. The tragedy though is that most do not know that they are speculating the prices of things they trade. They think that they are buying (or selling) something that has a fundamental value which is going to go up (or down). And this is a dangerous psyche; a recipe for disaster.
Only assets that throwout cash can be valued. For instance, real properties, bonds, and stocks. Obviously then assets that do not bear cash flows cannot be valued. For instance, gold, silver, and currencies. They can be traded and priced. The price is then purely based upon demand and supply. And demand and supply are clearly based upon the traders' perceptions. They are not backed by the intrinsic characteristics of the underlying asset. For instance, prices of stocks are of course defined by the movements in demand and supply. But demand and supply are based upon the quality of the business behind the stock. That means, when the business does well, the prices go up, and vice versa. That is true on a scale of long periods of time. However, there is no such scale for assets that do not have any underlying (and cash flows). Their prices move on whims of speculators. Nothing wrong, but nothing much for someone in the right mind, who wants to make money on a probabilistic note.
Now, bitcoins do not have any cash flows associated with them. There isn't any business or an asset behind it. In such cases, how do we know the intrinsic value of bitcoins? Well, we cannot. We are then dependent upon someone else's perception. One fool buys in the hope that there will be another fool to buy at a higher price. The second fool is in the hope to sell to another for profit. And it goes on...until there aren't any fools around to buy. This is when we say that the bubble has burst. The greater fool's theory is an interesting one, for it has been witnessed in the past many times, but lessons are never learned. There's also a reason for that. The early fools usually get away with substantial profits; and everyone wants to be the early fool during every bubble in the making.
If one of the sharpest minds we have seen could not control greed and envy, how could lesser mortals make do with it?
I have been talked to in the past few months to buy into bitcoins. I resisted like I always do when it comes to speculation; I am no good at it. When you are likely to fret over things, you rather stay away. In fact, I am not even sure if bitcoin is able to sustain as a store of value for long; to that extent it might even fail the currency test.
If your neighbor is driving a fancier car, and you fret over it, there's something wrong with you. And if you chase the neighbor's car, there's seriously something wrong with you. The earlier you realize this, the happier you will be.
What I know for sure is this: there is an easier route to riches, rather to being financially independent. That is to play the investing game, for long. You could do index investing, or you could do the business of investing. There's a choice.
Let the bitcoins be.
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