- BitCoin is backed by nothing
- BitCoin is different from Fiat Currencies, despite what supporters say.
- “Don’t understand it, stay out of it” is the golden rule
There aren’t many people that won’t have heard of the BitCoin story. BitCoin is an algorithm which people use to make transactions. It is not a currency, despite what people say. People would be more accurate if they thought of it as blocks in an accounting system, that’s it – nothing more than that.
The rise in value of this accounting system is on two things. The first is the accuracy of it, does it accurately report someone’s ownership of a part of that block. Can it be interfered with so that the accountancy system can be altered in some way?
The second part is, will this accounting system continue be used in the future? At the moment, those supporting BitCoins say that it will. If that is the case, the value will in theory continue to rise.
So what are the risks to BitCoin?
As far as we can tell, BitCoin’s foundations are quite sound. We have yet to hear of any credible threats to the platform. That’s not to say that there won’t be in the future. With the launch of BitCoin’s futures markets, there is now money to be made in trying to break it. If anyone does manage to break it, the price of BitCoin will be zero and the people that broke it will make billions. Millions of people are out there trying to break it, that's a relatively new thing.
The risk to confidence to BitCoin’s future is much more credible, in fact it should be worrying to those who are continuing to throw money at it. It is often said that BitCoin is the same as Fiat currencies. But this is just completely wrong.
Fiat currencies are currencies where money is just printed out of thin air. These include the Pound and the Dollar. In a way it doesn’t sound good, but it has its benefits. All that's for another time though.
Before the Pound became a Fiat Currency, you could in theory take a pound note to the Bank of England and in return walk away with a pound in weight of Sterling Silver. When the Pound Sterling was converted into a Fiat currency, it changed so that you would walk in to the Bank of England with a pound and they would send you on your way with another pound - pointless.
Because of this, Bitcoin people say that Bitcoin is the same as the Pound and Dollar, or even better because only so many blocks of currency can be made. What they seem to forget though is that the Bank of England hold a lot Gold and foreign reserves to maintain confidence in the pound. BitCoin has none of that. It is often forgotten just how important that is to traders.
People aren’t buying BitCoin because they think it can be used for xyz, they are only buying it because they think the value of it is going to go up in the near future. Our view is that everyone knows this is a bubble, the game is to not be holding the bubble when it goes pop.
Even if it does go pop though, we think it will probably bottom out at around £2000. For it to be worthless and drop to zero, it will require Government intervention. BitCoiners say that "this won’t happen" - wait a minute, we will correct that - "it can’t happen".
This is where their argument falls down. They claim that BitCoin will kill the big banks, revolutionise the banking industry and cost the rich and powerful trillions. But they seem to forget that the rich and powerful own the media, own the telecoms companies and own Governments.
When the non bank lenders like us went up against the banks we got whacked with caps. Believe us when we say, the banks and Government will kill it when it becomes a threat. The first sign of this happening is when regulators get involved. The regulators are competition killers, oh, they've already started to target BitCoin. People that buy BitCoin should be aware that it could be declared illegal at any point and at any moment, being found with them could be criminal offence.
Stay out of it is our advice.