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Friday, 26 January 2018

If Bitcoin is a scam, is Blockchain too?

Several months ago, a Kenyan friend asked me if she should invest in Bitcoin. She had no clue what Bitcoin was. Two weeks ago, an acquaintance asked me to join him in buying Bitcoin. He invested a large amount. Despite recent price decreases, he still had a profit. I strongly advised him to cash his Bitcoins. He was reluctant to do so as he expects the price to go up again.

The start of the bearish US Bitcoin futures trading, and the increasing global regulation around cryptocurrencies (eg, Bitcoin, Ethereum, others) have caused a steady decline in their prices. There is, however, still a weird and significant Bitcoin pricing variance between South Korea and the rest of the world - the Kimchi premium. Apparently, there is either no arbitrage in Bitcoin, or the complex and/or time consuming Bitcoin buying/selling procedures prevent arbitrage.

There are more weird facts about Bitcoin and Blockchain. Some of them have been mentioned in my 2015 blogs on Bitcoin and on Blockchain. Despite its extreme popularity, few people actually know something about both, let alone their fundamentals.

Bitcoin is an artificial and digital currency which has no underlying (or intrinsic) value compared to official currencies (eg, Euro, US$). Its price is entirely based on market speculation. The Bitcoin price is (very) volatile as Bitcoin supply is fixed (ie, maximised) and demand is variable - and surging worldwide. Cashing profits by divesting Bitcoins is becoming more and more difficult (eg, regulations, reputation risk at regular banks).

The supply of new Bitcoins is a process called "mining". Essentially, ever larger numbers of computers are busy cracking increasingly difficult algorithms, while using more and more electricity (eg, cooling, processing power). The volumes of electricity used have been raising recent alarms (eg, CNBC). This architecture is by design and is not a design flaw.

Identities of cryptocurrency owners are hidden behind a "private key" of many (random) computer characters (eg, NYT). Hence, Bitcoin was rather popular amongst criminals. Acquisition and divestment of Bitcoins is often not supported by regular banks. Obscure companies and/or banks facilitate such transactions - at hefty fees (eg, FT).

In 2015, I concluded that Bitcoin is likely a Ponzi or pyramid scheme. The ones who entered first will become rich by divesting through the entrance payments of newcomers and latecomers. Both have little to no idea what they're investing in. The truth may finally be revealed in 2018.

That raises a vital question: if Bitcoin is a scam, could Blockchain also be a scam?

News coverage that Kaspersky Lab's anti-virus software algorithms are also being used as Russian spying software, has changed my mind (eg, my 2015 Blockchain blogThe Times, Wiki). If Bitcoin is a scam then the Blockchain algorithms may also have a scamming purpose.

Money's Too Tight To Mention (1985) by Simply Red

Now what are we all to do
When the money's got a hold on you?