By now, you’ve definitely heard of Bitcoin. You know, the notoriously volatile digital cryptocurrency that’s been fluctuating more than the price of petrol in school holidays? It’s been getting a lot of press lately.
Cryptocurrency isn’t just a risky investment opportunity for the adventurous – it’s actually meant to be an alternative way of paying for regular things. Over 100,000 merchants worldwide accept bitcoin, including Microsoft, Expedia and at least a couple of Subway sandwich shops. In 2017, we started to see property exchanging hands for Bitcoin.
Before we talk about whether it is or isn’t a good idea to buy property in Bitcoin, we’ve got to first ask: why are people using Bitcoin?
The allure of Bitcoin
Part of the appeal is probably the face-melting pace at which the value of Bitcoin has been increasing. Since 2009, the value of Bitcoin has gone from about eight hundredths of a cent to $8,188 (at the time of writing). That’s a meteoric rise in value.
It might also be the thrill of doing things that are a little bit risky – why do people put money into pokies, or bet on horses, or invest in stocks? It’s an exciting way to make a bit of cash.
It probably also has something to do with the evolution of the buyer demographic, which has gone from mums and dads to the younger, tech-y generations who want to pay with alternative methods.
Some might see it as a revolution – it is, after all, a decentralised, denationalised, digital currency operating outside the traditional banking and governmental system.
Still, is it really a good idea to carry out a large transaction – like buying or selling a house – with a commodity as volatile as bitcoin. Certainly, you should question the logic of treating bitcoin as a currency at all. You could potentially lose your whole nest egg in the time between closing the deal and handing over your keys. Just because you can, doesn’t mean you should. Here’s why…
Humans are optimistic – sometimes too optimistic
‘Optimistic psychology’ refers to the fact that we’re only human, and psychologically we get swept up in the excitement of making a quick buck.
Remember fidget spinners, the must have toy of 2017? Those things were super annoying for the general population – but spare a thought for this guy, for whom fidget spinners were a costly lesson in bad investment.
This is a classic example of human optimism blinding our ability to make rational decisions.
Demand for fidget spinners went up and up, and – clearly – this guy thought things would keep going that way. Apparently, he forgot that kids lose interest in toys in a matter of weeks (if not days). He thought he was making a good investment.
Now, imagine instead of buying $6000 worth of fidget spinners you could not sell for love nor money, you decided to sell your house for Bitcoin. Suddenly, you’d be in control of a large amount of this volatile cryptocurrency. You’d be highly invested in Bitcoin increasing in value.
Once we’ve invested in something, we want things to work out. We don’t want to be wrong. We hang on, even when things start to take a downward turn. When prices are rising, and the market has been in a sustained uptrend (with tiny spikes of down), we’re optimistic. We see those tiny spikes of downtrend through rose-tinted glasses, instead of indications that it’s losing value in the long term.
We know it’s risky, but hey – other people are doing it and they seem fine! Better than fine, in fact. We’ve all heard stories of someone turning $1,000 into $50,000 through Bitcoin.
Look at the Venmo pyramid scheme, which took over Instagram etc earlier this year. Crazy? Yes. And yet, everyone between the ages of 18 and 25 was doing it – putting faith in eight complete strangers. At least, it seemed that way.
We don’t like letting a bandwagon pass us by, that’s for sure – even when all logical reasoning says we should.
Not all of us will be able to ride the wave
Applying a little bit of technical analysis brings us to the same conclusion: taking part in a property transaction for Bitcoin is a bad idea, because Bitcoin is in it’s fifth and final wave.
What do we mean by that? Well, the Elliott wave principle is a form of analysis used to forecast market trends by identifying extremes in investor psychology, highs and lows in prices, and stuff like that. In a nutshell, the theory is that social mood drives the market. It became popular when it was used to correctly forecast the stock market crash of 1987 – however, as with all theories, there is some debate about its accuracy.
If you want to know the specifics, here’s a better explanation: collective investor psychology naturally shifts between optimistic and pessimistic extremes, creating patterns – waves.
Lots of investors will follow the crowd psychology and trade on these extremes, feeling comfortable because of a trending stock or share. According to Elliott, these mood swings always show up in the same repetitive patterns: five waves which zig-zag upward, followed by three corrective downturn waves which generally return the stock or share closer to its original state.
Savvy analysts have been using the Elliott wave principle to track Bitcoin since the beginning – after all, as a market largely driven by psychology and speculation, you’d expect Elliott Waves to be applicable to Bitcoin. Professionals are now saying it’s in its fifth wave, which means the corrective waves are coming.
Of course, you could choose to ride the wave (or disregard the theory entirely) – but you might not come out on top.
It’s too new to be a perfectly oiled machine
There’s still a few things that need to be sorted out before Bitcoin is a viable currency for the masses.
Firstly, there’s transactional bottlenecks. Bitcoin runs on Blockchain technology, which is essentially a virtual public ledger holding all transactions in a secure yet transparent way. However, transactions need to be recorded in that ledger – and that takes time.
By modern standards of digital infrastructure, Bitcoin has a very limited capacity for processing transactions – resulting in increasing transaction fees and delayed processing. The best Bitcoin network could probably process about seven transactions per second, whereas Visa processes about 3,674 transactions. To put it bluntly, the Blockchain isn’t currently able to handle mainstream adoption – which brings us to another bottleneck.
The skill bottleneck is believed by some to be the biggest bottleneck in the Bitcoin ecosystem. It make sense: in order to improve and create solutions to Bitcoin’s problems, we need manpower to carry out the work. And there simply isn’t enough of that.
There’s also a lack of legal skills, creating another bottleneck. When you’re dealing with large investments, in a space where regulations and tax laws are quickly evolving, you’re going to want to get legal advice. So, if you’re considering selling your house for Bitcoin, get in line – there’s a long, long wait list.
These are just a couple of the bottlenecks in Bitcoin and Blockchain technology. Clearing them would allow us to make way for a new era of innovation and creativity, but that’s going to take some time.
This is the real crux of the matter. Bitcoin has all the hallmarks of a huge speculative bubble – and we’re not the only ones that think so. Smart people like Warren Buffett are eschewing the digital currency with a firm hand.
Ever heard of Tulip Mania? Some professionals think the Bitcoin phenomenon is the 21st Century’s version.
Analyst Elliott Prechter probably does the best job of explaining how the collapse might happen, and it’s an unhappy coupling of everything we’ve just explained:
“A bearish trifecta — the Elliott wave pattern, optimistic psychology and even fundamentals in the form of blockchain bottlenecks — will lead to the collapse of today’s crypto-mania.”
Together, these things will lead to the inevitable demise of Blockchain – or so the professionals posit.
Whenever a new technology emerges, it often attracts a lot of investor interest – like bees to a honeypot. It happened with the internet in the 90’s. Now, we’re seeing it with Bitcoin.
However, what we seem to be forgetting is that it’s still an evolving technology. As Prechter says, “The distant future of crypto is bright” – the key word here being distant, friends. And for all we know, the future might not even be Bitcoin – it could be another cryptocurrency altogether. The most exciting part about this phenomenon is the technology behind it, Blockchain.
If you want to know more, have a watch of this video. In the meantime, you might want to think about sticking to old school cash for a little while longer.