Should you invest in Bitcoins?

Friends,

Unless you have been living under a rock, you have heard of the hype around Bitcoin surging to unseen heights (up to 6500 EUR/7700 USD as of this morning). The topic has come up several times during recent conversations with friends, if you follow our Facebook page and Instagram account you saw that even investment banks such as JP Morgan are expressing opinions on Bitcoin and cryptocurrencies in general,… Although Bitcoin and the Blockchain technology have been around for almost a decade, 2017 is definitely the year of Bitcoin. Its value has already multiplied by 7 in 2017 so far! So if you had bought for 10 000 EUR of Bitcoin on the 1st of January you would now have 70 000 EUR worth of Bitcoin. Amazing investment, right? It sounds like you should just jump on the train,… well let’s hold our horses and evaluate carefully how and if we should invest in Bitcoin? 

First things first : What is Bitcoin all about?

Bitcoin is a digital currency created in 2009 by Satoshi Nakamoto. As per today the identity of this person (or group of persons) remains hidden and he is (they are) said to own 1 million Bitcoins.

Investopedia has created this useful and simple infographics which will help us understand what is Bitcoin.

What is bitcoin

To add to the above

Let me get the drugs an criminal activities financing out of the way straight away. Yes, Bitcoin has been used on Silkroad to buy drugs and other illicit products, but it is no different than drug dealing in the street with cash. No one says the USD, the Yen and the EUR are scammy currencies. As Nicholas from the Norwegian Bitcoin Association told us yesterday at their presentation on Blockchain, you’d actually have to be stupid to buy illegal stuff with Bitcoin as every transaction in the end is visible on the Blockchain. That is how the founder of Silkroad was caught.

The Satoshi is the smallest unit of the bitcoin currency recorded on the blockchain It is a one hundred millionth of a single bitcoin (0.00000001 BTC).

Miners (the people that create Bitcoins and verify the transactions) are regular people that do this from home or from a Bitcoin Mining Pool, i.e. a group of cooperating miners thanks to powerful computers. Once enough transactions to form a block of data of 1 MB have been confirmed, the block then gets added to the chain. Block#N+1 gets added to block#N and so on, at the time of this article we are at block #494762. For each transactions the miners get rewarded in cryptocurrency.

As illustrated above there is no bank or central organization issuing or backing the digital money as with fiat money, Bitcoin was created in 2009 after the financial crisis as a way of creating a form of money that would not be subject to the influence of central banks or financial institutions. It is the miners themselves that are reconciling transactions and providing the security through verified block chains and cryptography, there’s hence no need for an overseeing institution. And this is why banks are talking cryptocurrencies down and calling them a fraud for example. If cryptos start to become mainstream, many jobs and revenues might be threatened.

The value of the cryptocurrency relies entirely on what the market thinks it is worth. There is nothing really defining the intrinsic value of a Bitcoin as explained here.  I have asked the question at the meeting of the Norwegian Bitcoin association and the answer was similar, the value of Bitcoin is what people are willing it to be, how they value it. In other words if the market believes Bitcoin should be worth 10 000 EUR or 16000 EUR, then it will go up to that price.

Bitcoin is considered mother of all cryptocurrency and is the one making the headlines, but there are far more out there. As per today about 900 cryptocurrencies are  listed and this number still grows everyday. Some are just scammy ICOs though, Initial Coin Offering aiming at gathering funds to start up a new cryptocurrency. Since it is out of government hands, in case of fraudulent ICO, you could potentially lose your “investment”, so be careful.

Blockchain, the underlying technology of distributed database/ledger is now being described as the potential solution to a lot of the world’s problems, with applications envisaged not only in financial services but as well in industries as diverse as logistics, healthcare and food. One concrete application of the technology that IBM and Walmart are using is the tracing of food contamination. This is absolutely powerful stuff. Ivan Liljequist from “Ivan on Tech” has many videos discussing how the Blockchain can help end world poverty. I really enjoy his channel, he is knowledgeable, very passionate about his topic and I recommend you to follow it.

Finally, for those who really want all the technical details about Bitcoin, please find the in-depth guide here.

Bitcoin in real-life, what the fork is going on?

Is Bitcoin used as digital money? Well let’s go back to the goals of traditional money. It serves 3 goals :

  • A means of exchange : This replaces the previous barter tradition, I give you 2 bags of wheat for 3 chicken.
  • A store of value : It must hold its value over time so you can save it and use it later.
  • A unit of account : Money provides a common base for the price of goods and services.

Today you can buy goods and services with the digital cryptocurrency, the first trade was actually 2 pizzas bought for 10 000 BTC. Some physical and online stores accept it but do you see many people buying their local groceries with it? I don’t. It is not that widespread yet, the adoption is still slow and it is expensive as this video shows. Even in what I call the capital of the universe (NYC), you will not be able to use your bitcoins at every corner of every street. Regarding the unit of account, well it is too volatile to offer a common base for the price of an everyday product. A beer might cost 0.00045 BTC today and 0.00037 BTC tomorrow at the same bar. The daily volatility is around 5%, whereas it typically varies between 0.5% and 1% for Forex trading. In practice what we see is that most of the people use it as a store of value with the purpose of speculating on it and making huge profits.

“A flap of a butterfly’s wings could literally drive the Bitcoin price in all directions”

You now know what a Bitcoin is and that the price is very volatile but how come its value has risen and fallen so much 2017? In general the price of Bitcoin has been very sensitive to any type of information. Price movements whether up or down have been triggered by as little or as much as a tweet from banker, a country announcing they want to ban Bitcoin Exchanges, a hard fork announcement, etc. A flap of a butterfly’s wings could literally drive the Bitcoin price in all directions (okay I am pushing it here, but you get the point). Here are a few facts behind the recent price movements :

  • Japan has announced in April it would accept Bitcoin as a legal form of payment.
  • General public awareness has increased and the demand has moved faster than the supply (Mining has become more difficult and requires tremendous amounts of energy).
  • The high demand for Bitcoin has come mostly from China (protection against last year’s  devaluation of the yuan) and India (lack of trust in government after removing some of the banknotes in 2016).
  • Bitcoin has started to gain interest from financial institutions and large investment banks, the latest price increase was after the announcement of CME launching a Bitcoin derivatives platform.
  • Bitcoin has undergone and survived so-called hard forks : Simply put the creation of a competing currency (and hence new blockchain) based on the same history but with new rules.
  • Wall street is still divided on Bitcoin : JP Morgan considers it a fraud, Goldman Sachs is rumored to explore a new trading platform for Bitcoin and Ethereum. Morgan Stanley considers Bitcoin more than just a fad, Jordan Belfort the Wolf of Wallstreet himself is against Bitcoin.
  • I have followed the cryptocurrency news since this summer and from August it has been nothing else than a real soap opera (just look at the price action for the last 6 months) with the hard forks, the criticism from bankers, China banning ICOs and exchanges, CME´s announcement, Bitcoin cash trying to overrule Bitcoin last week end,.. Following the crypto news will definitely keep me busy while I wait for the next Suits episode!

 

Capture d’écran 2017-11-17 à 13.28.50.png
Tradingview.com – BTCEUR – 17.11.2017

Investing in Bitcoin for dummies

After all of the above you still wanna join the madness? Hold on tight, here is a little appetizer before you start investing or betting your money in the cryptocurrency sphere.

Yep, not for the faint-hearted! Here you will find my plan

  1. Register on Coinbase or any other verified digital exchange to start acquiring Bitcoins. You can use this link to get 10 USD worth of BTC as a sign-up bonus.
  2. Make sure you store your coins in a digital wallet to protect your assets : most digital wallets should do, but you can check the video from Ameer Rosic to help you choose.
  3. How many bitcoin should I buy Jonathan? And by the way I do not have 6500 EUR lying around. Worry not my friend, the good news is you need not to purchase whole bitcoins, you can start by buying tiny fractions. You can buy as little as 100 EUR or even 10 EUR for example. If you feel more risk-prone then a reasonable rule of thumb is to “invest” up to 1% of your net worth*. The reasoning is that if your net worth is 130 000 EUR, then you will be able to tolerate a loss of 1 300 EUR should Bitcoin come crashing down. As a general rule you should invest what you are prepared to lose.
  4. Leave your emotions and your friends FOMO (Fear of Missing Out) and FUD (Fear, Uncertainty and Doubt) at home. They are bad company for investors and you’ll sleep better at night without them. Sure, this is easier said than done. To take an example : Who do you think will sleep better at night?  You that invest the 127 USD you have left at the end of the month or Robin borrowing 100 000 USD to invest in Bitcoin?
  5. If you invest for the long term, adopt the “invest and forget approach” : Keep your Bitcoins safe in a digital wallet and hold on to them without watching the price movements everyday.
  6. If you want to trade actively, my best tip is to follow Datadash´s advice and if you have your coins on Coinbase to trade them through the sister platform Gdax (see why and how here).

 

IMG_1626

Just to be clear folks, the above is a guideline and in no way an encouragement to go crazy on crypto-investing. I repeat it once more, invest what you are prepared to lose. Bitcoin is very volatile and remains a very risky asset, for what it is worth 1 BTC could go up to 12 000 EUR by Xmas and fall to 1 EUR in 2021. Investing in crypto is quite a new phenomenon and I found it honestly not simple to connect all the dots together at first. Don’t buy into the hype and fear of the media. They are specialists at appealing to our emotions of fear and uncertainty (the criminal use of Bitcoin is a good example).

Do your homework, understand what you are getting yourself into as with any investment types and follow these 3 Youtube Channels : Datadash (honestly this guy cracks me up – this intro is epic), Ivan on Tech and Ameer Rosic. They provide independent information and you will help you to navigate through the jungle of information and disinformation. Warning : you might get hooked to their channels! You can also join a local bitcoin/blockchain association to exchange ideas and concerns and finally feel free to comment below or drop me a line at jon@joneytalks.com I´ll be happy to help.

Oh and by the way I currently own positions in BTC and ETH and I slept like a baby last night.

Conclusion or my 2 Satoshis on Blockchain and Bitcoin

Regarding the Blockchain technology, although it is still intricate to me, I am very positive and see the unprecedented value it can bring to the world. Just imagine if we had used the blockchain technology to have the traceability of the food chain in the horse meat scandal in frozen lasagnas a few years back in Europe. Ivan Liljequist is travelling the world and spreading the positive aspects of the Blockchain Technology which could help reduce poverty. I am also keen to see the developments for smart contracts which will affect us all in the years to come through our insurance contracts or car sale process for example.

I am also very positive to Bitcoin. I find it so powerful through its strong political message, its disruptive nature and intriguing technology. At the time of the article and due its volatile nature I would consider any money put towards crypto as a bet or a speculation and not an investment.  Whether Bitcoin´s price will shoot to 25 000 USD, be replaced by another digital currency or simply vanish, no one knows but it is undeniable Bitcoin and Blockchain have shaken the political and financial establishment. We will see profound changes in the years to come in the way banks operate, the way we buy goods and services,… we are only at the very beginning.

There are many subjects surround the cryptocurrency I have not touched upon as the subject is very wide. My goal was to give you a simple basis to help you understand what the hype is all about and where to look for further relevant information. I will definitely publish more articles on the subject as it is evolving so quickly!

So now tell me friends : What are your views on Bitcoin and the Blockchain technology? Do you think Bitcoin is a fraud? Do you see it become the digital gold? Have you invested yourself?

 

*Net worth : your assets minus your liabilities, example add the current market price of your home, your car and savings and subtract your mortgage and other debts.

 

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