| |Dispelling the myths of Bitcoin
Bitcoin has gotten a lot of media attention in the last few months. You’d have been hard pressed not to see a story about its skyrocketing trading value as it got close to $20,000 USD.
Some people think that Bitcoin is the new “money” that will soon be the backbone of the world economy. We say “Not so fast.” Let’s take a step back and take a closer look. If you’re thinking about investing in Bitcoin, or another cryptocurrency, read on before making your decision.
Money must be three things:
- A medium of exchange. Meaning you can use it to buy or sell products and services. Before money, people exchanged goods and services for other goods and services. (Remember when you tried to trade that apple in your lunch box for the chocolate bar your friend brought? With money, trade is easier – you can just buy your own chocolate bar.)
- A store of value. Money should be able to be used to build up savings because its value stays relatively stable. It must also have stable and largely predictable purchasing power. That means the money you have today will buy more or less the same amount of stuff tomorrow. Money works best if its value is slightly inflationary. When a currency is inflationary, it means that the dollar you have today will have less purchasing power in the future. A bit of inflation encourages people to spend their money and keeps the economy moving. This is part of what governments are doing when they adjust interest rates and the money supply. But Bitcoin is acting in a deflationary manner. Its value is increasing based mainly on people being very excited about it creating market hype and speculation. This encourages people to hold on to their Bitcoin – not spend them.
- Accepted as a “unit of account.” Money allows us to compare the value of products and services and express this value as a price. We can then compare costs of things and make financial decisions.
Bitcoin has only one of the properties listed above: it is a medium of exchange, but even still, it is not generally accepted as a form of payment in a lot of places. It doesn’t meet the other two requirements, mainly because its value is so unpredictable. And so Bitcoin is not being used as any sort of traditional currency. To be money or to be a real store of value, it must be stable.
It’s natural to be curious about Bitcoin as an investment opportunity. But if you’re like many New Brunswickers, you might not know the reasons to be cautious about it.
We can provide you with five.
1) Bitcoin does not solve an existing consumer problem
Most people do not use Bitcoin for making day-to-day payments. It is not more convenient or efficient to use Bitcoin to run your errands or make your purchases. It is not accepted in many places and the transactions are slow and expensive.
The bitcoin network can process between three to seven transactions per second (or TPS). Visa can process approximately 56,000 transactions per second. Besides the fact that transaction processing time is extremely slow compared to existing payment methods, this Bitcoin bottleneck is causing transaction fees to increase.
Beyond speculation, its only major advantage over existing payment methods is its purported anonymity. Unfortunately, in many cases, this anonymity is being exploited and Bitcoin is being used for purchasing and financing illicit goods and services, like money laundering. Bitcoin does not solve any specific consumer payment problem that is not already addressed by the existing financial system, or that could not be solved within that system with reasonable effort.
2) Bitcoin is more complicated to use
Even if Bitcoin did work as well as existing payment methods, you still have to learn a whole new set of rules and procedures for Bitcoin transactions. It’s just not worth it for most people to go through this extra trouble.
You have to use digital wallet and exchange services for buying and selling cryptocurrencies. Not only can they be complicated to use, there are a lot of additional risks in storing your money in a digital wallet or exchange rather than in a regulated financial institution, like a bank or credit union.
Wallet or exchange providers can be hacked. At the end of the day, you’re simply replacing a regulated insured intermediary (a bank), with an uninsured and in most cases unregulated one (the exchange or wallet provider).
3) Bitcoin deposits are not insured
When you deposit Canadian currency into an eligible account at a bank or credit union, your deposit is insured. This insurance is free and automatic. It protects you in the case of bank failure. Deposits at banks are insured federally by the Canada Deposit Insurance Corporation (CDIC). Deposits at Credit Unions are insured provincially − in New Brunswick by the New Brunswick Credit Union Deposit Insurance Corporation (NBCUDIC). If the bank or credit union fails, the insurance automatically pays out.
There is no insurance for Bitcoin or any other cryptocurrency. It is hard to imagine why the average consumer would give up this insurance, simply to keep their day-to-day money in a cryptocurrency. If (or when) your digital wallet or the exchange is hacked, your personal information and your money is at risk. There is no payback from the wallet or exchange to recover what you lost.
4) Bitcoin offers no customer service
Any day-to-day monetary system has to allow for human error, and provide a way to fix those errors. Think of the message at your bank when you pay a bill or transfer money to someone. Once you complete the transaction, you may be able to call the bank if you’ve made a mistake or want to cancel the transfer. If you sent your Bitcoin to the wrong or a nonexistent address, it is lost and you have no customer service to call.
5) Bitcoin isn’t regulated by anyone
Bitcoin operates outside of regulation, which makes it prone to all kinds of manipulation. Investors should proceed with extreme caution when thinking about investing in Bitcoin or any cryptocurrency. Be sure to speak with a registered investment professional before you make any investment decisions. You can check if an investment adviser is registered on the National Registration Search tool.