Bitcoin Problems


Bitcoin is a cryptocurrency that means it’s not tied to any particular central bank or any particular country. Instead it’s managed by a distributed algorithm. Computers all across the world maintain something called a blockchain and all of the chain of trust is maintained in that blockchain. Now for paranoid people bitcoin is very attractive because it’s anonymous you can’t link your ID on bitcoin with your real ID. Now personally I would never invest in bitcoin or any other cryptocurrency for that matter so to see why let’s look at the problems with bitcoin. There have been some really abysmal reports on bitcoin in the media. Particularly annoying was a story reporting tha bitcoin was worth more than gold. Reporters would trot out this graph showing the price of Bitcoin and the price of an ounce of gold and they’d show that one line was crossing the other. Here’s the same story on the BBC and in many other news outlets. The other kind of story which is misleading is where they talk only about the return on bitcoin which admittedly has been very high. So let me tell you why these stories arouse no interest in me whatsoever. Investors should concern themselves with risk as well as the return of each asset class and if we look at the risk of bitcoin, this is the volatility since 2014, we can see that it’s extremely high. In this graph the riskiest assets are at the top and the lowest risk assets are at the bottom. You can see that most developed market currencies have a volatility of about ten percent and that means that in a typical year their price would move up or down by about ten percent. Gold is a little bit more risky at fourteen percent volatility, developed market equity such as the FTSE 100 will give you a volatility of around fifteen to twenty percent. Emerging markets will be a little bit higher between twenty and twenty-five percent or maybe even thirty percent. Oil’s the highest volatility of the normal asset classes at around thirty five percent per year but bitcoin is by far the most volatile, by far the most risky. Its volatility is twice that of oil and almost seven times that of a normal developed market currency. Now that’s what the reporters should be talking about as well as the return and it puts it way beyond any kind of risk I’m willing to take with my life savings. But volatility isn’t the only reason I’ve never invest in Bitcoin. Oh no. If you look at the website coinmarketcap.com you’ll find two hundred and more alternative cryptocurrencies. Bitcoin’s currently the largest but there are many alternatives so there’s no reason why Etherium, Dash or any of the other competitors couldn’t overtake bitcoin and turn it into the Betamax of the cryptocurrency world. That’s the danger with any disruptive technology; it may itself become disrupted by competitors. More worrying from bitcoin’s point of view is that central banks are also looking at creating digital currencies. Here’s a call for abstracts for a conference run by the Bank of England in 2017. If the Bank of England were to issue a digital currency that would blow bitcoin out of the water, it would be very hard to compete with a central bank’s digital currency. One of the philosophical principles of bitcoin is that it doesn’t require you to trust a single counterparty. Bitcoin is based on cryptographic proof in other words solving hard computer problems instead of having to trust a counterparty, or at least that’s the idea. If you look at the plumbing behind bitcoin what you find nowadays is that it’s dominated by four very large bitcoin miners. Between them they make up fifty-four percent of the transaction checking system, or the hash rate, of bitcoin. So in other words instead of having one Big Brother you have four Big Brothers. So far from being a distributed system it’s now fairly centralized in these four large companies and collectively they could choose to block, reverse transactions or even change the entire bitcoin protocol. Then there’s a problem with criminals. Because bitcoin provides anonymity it draws a wide range of shady characters into the cryptocurrency. The cryptocurrency’s widely used by criminals for things such as ransomware where someone takes over your computer and forces you to make a payment to unlock your computer, or money laundering, or selling stolen credit card numbers, or payments for illegal drugs and weapons. Personally that’s not the kind of company I want to keep. Then there’s the problem with exchanges. If you want to convert your money from cryptocurrency back into normal currency you have to go via one of these exchanges. Now many of them are unregulated and as a result there have been some very large scandals where large amounts of bitcoins have simply disappeared. While the system remains unregulated that remains a danger. But to some extent all those problems can be overcome. The primary worry for me is regulation. To give an example, when China clamped down on its capital controls bitcoin exchanges were very tightly regulated and as ninety eight percent of the bitcoin exchanges were in China there was a dramatic fall in the value of bitcoin. A pair of brothers called the Winklevoss twins tried to create an exchange-traded fund for bitcoin. If you look at the SEC ruling it provides a real insight into the problems with bitcoin. And again, when that was rejected the value of bitcoin fell very sharply, coming as it did with China’s regulatory clampdown. You can find the ruling on the Winklevoss Bitcoin Trust ETF on the SEC website. Naturally, the SEC is trying to prevent fraud and to protect investors. They stipulate that the ETF would have to satisfy two criteria: it had to have some kind of surveillance sharing agreements with the markets which would trade ETFs and secondly those markets have to be regulated. The primary problem was the unregulated nature of bitcoin exchanges and that leaves Bitcoin open to manipulation or fraudulent activity. Mark T. Williams wrote one of the letters to the SEC advising them about the problems of allowing the ETF to be created. He points out that many of the exchanges are based in places such as China, Singapore, Hong Kong and Bulgaria, and also that many of the exchanges have gone out of business and in many cases that’s resulted in multi-million dollar losses. And my primary worry would be that bitcoin would be successful because this in itself would lead to failure. Governments in developed countries have certain powers: they control the military, they control the creation and maintenance of law, they control the collection of taxes which they use to fund their activities, and they control the creation of money and the maintenance of stable money. If you try to take away any of these powers it usually results in tears. It really is like taking sweets from a baby. Ultimately all currencies are based on faith. The US dollar only has value because we believe it has value and when that faith disappears you get hyper- inflation as happened in Zimbabwe. Hence the 100 trillion dollars Zimbabwean note. But personally I do have a faith in the UK Parliament. I appreciate that the tin hat brigade may have issues with trusting the government but the Bank of England has huge resources behind it to maintain the stability of the pound. The Monetary Policy Committee exists purely to maintain this stability and, okay, they’re not perfect, but generally they do a very good job. So that’s why I put my faith in the pound and not in crypto currencies. Remember this is not a recommendation. Seek independent financial advice if you’re thinking of investing in cryptocurrencies. Now maybe you think we’ve got it wrong. You think bitcoin is fantastic! Or maybe you’ve lost money with bitcoin or another cryptocurrency. If so why not tell us about it? We’d love to know! Tweet us @PensionCraft, message us on Facebook and if you like these videos subscribe to our channel

22 thoughts on “Bitcoin Problems”

  1. While you bring up some good points about bitcoin itself, I believe the real value is in the algorithm. Bitcoin could very well be a bubble and fail but blockchain technology is solid and will be here to stay. Just as logging on to the internet with america online and your 56k connection had its flaws in its early days of adoption by the public this is no different. Also, if you believe "central" banks digital currency would blow bitcoin out of the water I believe you're missing the point.

  2. I'm thinking after seeing your helpful video, maybe bitcoins are like napster, the 1st peer-to-peer (P2P) file sharing Internet. That started the movement. Then their was a clap down on file sharing. Now we have corprate streaming music and video companies iTunes, amazon prime, Netflix, Spotify. It does make sense banks, and governments will make their own version to maintain control, and have resoruces to do so.

  3. On the date this video was published, 27 March 2017, one Bitcoin was selling for $1,045.77 USD. Today, 3 December 2017, just 9 months later, it's $11,162.00.
    If you had ignored this silly man and bought Bitcoin you would have made 10 times your investment (1,000%). Don't be influenced by these self appointed idiots.

  4. It's so hard to resist investing in Crypto with all the adds on Facebook and social media. But that's when you know its a bubble and it's going to crash soon.

  5. I don't think you quite understand the "Taking candy from a baby" analogy; Or Bitcoin. If you did invest in BitCoin on the day you uploaded this video you would be looking at over 1000% returns as of today. Price on March 26, 2017: $966 USD. Price today: $10917 USD. Just saying…..

  6. I agree today is way too risky to invest in bitcoin if that was few years back then it was worth it but i cant see it will keep growing rapidly, I find bitcoin more of a trend and people buy because others buying and advertised on news is thats only reason its growing? what will happen when everyone sell it? will it go down?

  7. I believe crypto is going to expand and is futuristic in its design..I hold Ethereum and will be investing with it on the many platforms springing up…it's a great way for companies seeking alternative s for investment..I believe Blockchain is here to stay

  8. Bitcoin is digital gold. It isn’t an investment, but it is an asset, and could be useful in hedging against major economic disasters, war, famine, hyperinflation etc. There is a good argument for holding ~1% of you asset allocation in crypto.

  9. Its a fascinating age where we can share our ideas so easily. This communication allows us to see the complete picture. I agree bitcoin is very volatile. However, you are comparing it with materials that were around for centuries. Blockchain technology is at an infant stage it needs alot of development. But, even at an infant stage countries like Argentina and Venezuela are thankful for having an alternative.

  10. Do you still feel this way about crypto? Would you consider putting a small amount into an crypto currency ETF?

  11. Mark Carney, has said a global digital currency, which sounds remarkably like bitcoin, could replace the U.S. dollar as the world’s reserve currency. We now know that crypto currency is about to become mainstream in the next few years.

  12. 3:22 False :
    1 – It's not true that 4 companies detain more than 54% of hash power. The pie chart shows mining pools not companies. Mining pools are aggregators of hash power from many smaller miner globally distributed.
    2 – An hypothetical 51% attach on the blockchain hashrate (practically infeasible today) can only reverse transactions (and this would be extremely expensive to do, practically making it not interesting at all), ergo transactions cannot be blocked.
    3 – Miners cannot impose change in the protocol because this would create a fork on the blockchain, this already happened with Bitcoin Cash and as we can see Bitcoin is still there like an honey badger 😉

    This video is full of inaccuracies or it's purposely biased… Shame on you! Booooohh…

  13. 4:50 False :
    1 – you can keep your Bitcoins under your private key control and get rid of exchanges for custody.
    2 – you can exchange bitcoin with cash using local bitcoins or with direct bank transfer using a decentralised exchange, you don't have to absolutely use an exchange like mtgox…

    Too many inaccuracies on this video…

  14. 6:40 You're luky to live in England, but the Federal Reserve and the European Central Bank are private company independent from governments… Your faith on your government has nothing to do with central banks on the majority of the rest of the world…

    Another inaccuracy..

  15. you have faith in your gouvernement ? that very same gouvernement that just shut down your parlement (i'm french not very much better in my country nowadays).
    démocracy is dying, we need gouvernance.

  16. 1. Misleading stories do not justify any problem with bitcoin.
    2. Volatility is not necessarily a problem.
    3. Just because there are other cryptocurrencies doesn't mean that one of them (BTC) is a bad investment. There are many soft drink manufacturers so does that mean you would never invest in Coca-Cola?
    4. The internet in many ways is unregulated but it still exists and is accepted (reluctantly) my governments. Things can change.
    5. Bitcoin will ultimately keep central banks honnest and slow the communisation of currency through QE and money printing and artificially lowering of interest rates – which they have been doing for decades and indeed CAUSING financial instability.

  17. I like some of your other videos but this one is full of misinformation. People watching this video should be aware that crypto is not the expertise of this guy and he understands it only at a superficial level.

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