Digital Currency Mania

In February 2017, one Bitcoin was worth around $1,000, and this week it touched a high of $2,800! The 52-week low for a Bitcoin is $447. This Memorial Day, at the cookout, I’m sure there will be many conversations around politics, technology stocks, sky high house prices, and Bitcoin.

In full disclosure, I have owned Bitcoin and set-up a Coinbase account years ago. I even looked into mining for new Bitcoin. At this point, I’ve probably lost you. What is mining? What is a Bitcoin? What is Coinbase?

Bitcoin is a digital currency. It was created on a network of computers called a blockchain. Rather than getting into the technical language on how a blockchain is created and why Bitcoin exists, I’m going to touch on what I believe is most important to your cookout conversation. If you want all the specifics on Bitcoin, you can click here.

As early as 2011, you could connect your desktop computer into this Bitcoin network. The founders of Bitcoin were not in it for the money. For those people who mined for new Bitcoin, it was a hobby that they did for fun. If one of these computers plugged into the network, helped to make a transaction between a buyer and seller, a Bitcoin would be rewarded into a Bitcoin wallet. In the early days, Bitcoin miners would lose money on each transaction because it cost more money to power your computer than what a Bitcoin was worth. As more computers joined the network, it became harder for a desktop computer to win new Bitcoin. The higher powered computers were rewarded more and more Bitcoins. As Bitcoin increased in value, the energy costs became a small fraction of the potential profit. It became so profitable that entire data centers were built to mine for new Bitcoin. These computers cost upwards of $10,000. The technology was moving so fast that a $10,000 computer would be worthless in only a matter of a few weeks time, as faster computers came to market. If you couldn’t afford a Bitcoin miner, you could buy fractional ownership of one online. Investors began to see the value in building the computers and not in the Bitcoin. If they could get enough fractional ownership, they would make money regardless of the price of Bitcoin.

New exchanges and digital currencies were created overnight. There are now hundreds of digital currencies all competing to become the next lottery ticket. Coinbase is the exchange where you can buy and sell Bitcoin. Many of the exchanges were shutdown because of fraud and only a few major ones survived. The speculation on these exchanges is 100x higher than at a Foxwoods roulette table. There is a dark side to Bitcoin exchanges and your money is never 100% safe.

These virtual currencies are used to launder money, finance terrorism, and other illegal activities. It would disgust you that there are many criminals and mafia members that have made millions on Bitcoin. This was one of the major reasons why I stopped trading Bitcoin.

Bitcoin has yet to be recognized as a major currency, but most major retailers recognize Bitcoin as a legal form of payment. The reason for the huge move in Bitcoin over the past month is pure speculation that more buyers are about to enter the market. If an exchange-traded Bitcoin fund is approved, it will add to the mania. I believe that this frenzy reached its apex as speculators around the world were joining in on this newly created bubble. These Bitcoin traders that are late to the party will lose the most money. The early buyers of Bitcoin are not selling, which makes this bubble so interesting to me. They believe that a Bitcoin is worth over $10,000 and not $2,800. While I don’t believe that Bitcoin is worthless, it is showing signs of a classic market bubble.

Happy Memorial Day, as we remember with pride those friends and family members who served and died for our freedom.

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