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Many banks and financial organisations have already said they will not touch bitcoin. If you are a private investor I would say the same thing applies. I understand why so many people are trading bitcoin, it is hard to find an alternative investment where you can double or triple your money in the next few months. That is the real attraction of bitcoin (if you ignore the risks). Private investors tend to focus on the return and not the risks, perhaps people should have a better understanding of the risks involved before trading Bitcoin.
Question: is Bitcoin legitimate? According to Forbes 10% of Bitcoin transactions take place on exchanges in China. The thing is, China and other countries have threatened to shut down the exchanges. Such a move would cause Bitcoin to drop sharply. China’s Internet Finance Association stated that Bitcoin “lacks a legal foundation”, its future in China remains unclear. At the moment governments around the world have allowed Bitcoin to flourish because virtual currencies pose no immediate macro risk. But if virtual currencies continue to rise they will become an issue and chances are, governments will crack down on Bitcoin and this will cause the virtual currency to collapse.
Is it a fraud? JP Morgan boss Jamie Dimon said recently Bitcoin is a fraud. I would not say if he is right or wrong, what I can say is that it’s possible Bitcoin is a fraud because it’s not regulated. Coins are created by computers boffins who can resolve complex puzzles, each time they solve the puzzle they get rewarded with new coins. Transactions are encrypted which means we don’t know who is buying or selling. Some exchanges don’t ask the buyer for ID, this makes trading bitcoin ideal for criminals like drug traffickers and those who launder money. The fact that the inventor of Bitcoin has never shown his or her face and has never revealed his or her identity is proof that Bitcoin is dodgy.
Is it safe? If hackers can get into the Pentagon or any large organisation systems, they can surely get into your digital wallet. The rising value of bitcoin has made exchanges prime targets for hackers. A number of hacked wallets have been reported to the FBI resulting in hundred of millions of dollars lost. Due to the lack of regulation and the anonymity of the parties involved, an investor who loses money would not be able to recover it.
Finally, and as you probably know, the rise of bitcoin has reached bubble proportion. It is not the first financial bubble and it won’t be the last. Over the centuries people have created bubbles, on each occasion the bubble burst and people lost money. The Bitcoin bubble reminds me of the technology bubble in 2000, we were told this was different, that was the new economy. Technology stocks were a one-way bet but in the end very few could predict the top. When the tech bubble burst the bulls bought the pullback. As the market failed to rebound they bought more. When the decline became more than a simple correction, investors realised that something was not right. The more the market declined the more investors bailed out, their action accelerated the decline. In Elliott wave analysis that was the third wave down, which is the most powerful decline in the sequence. For many it was too late to act, most people lost money.
If you hold bitcoin, you’ve been warned. Don’t be greedy, get out now!
Thierry Laduguie is Trading Strategist at www.e-yield.com
