Well now, it's a fundamental of investing that you should understand what you're investing in. So I have done some basic research into cryptocurrencies and I can now say with some confidence that I still don't understand them.
They are based on what is known as blockchain technology, which is, and I quote, '"a growing list of records, called blocks, that are securely linked together using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data (generally represented as a Merkle tree, where data nodes are represented by leaves)."
Apart from wondering why the leaves on the Merkle tree aren't leaves, I am so far out to sea with this stuff that there's no point in even trying to swim. And I'm sure the same is true for most people.
Therefore Bitcoin is mainly a currency of credulity. You have to believe that the stuff exists, that the people who make it and trade it are on the level. It has no inherent value. You cannot eat it, drink it or brain a burglar with it. You can't even burn it to keep yourself warm. A Bitcoin is worth only what people believe it to be worth.
But the same is true of a dollar. If you go into a bank and ask for a dollar, all they'll give you is a coin or a promissory note that represents the idea of a dollar. The dollar exists only as that idea, that shared belief. If the belief collapses - as has happened to numerous currencies over the years - then the value fizzles to nothing.
Dollars are printed by governments and they can always print more of them. But you can't just print more Bitcoins, or at least so we are told.
They have to be 'mined' by prodigious numbers of computers doing prodigious numbers of calculations at a prodigious cost in electricity. This, again if we believe them, gives Bitcoin the virtue of rarity, and makes it more similar to a metal like gold, which is precious largely because there isn't much of it.
The second advantage of Bitcoin and co is that they are unofficial currencies. And that, one suspects, is their main attraction.
Finance is a huge business of bewildering complexity, but its one unifying feature is that it is done with money, and money goes through banks. So all transactions, at least in theory, are visible to the authorities who can thus ensure, again in theory, that the business being conducted is a. legal and b. taxed.
Cryptocurrencies appeal to those who do not wish the authorities to see what money they are getting and how they're getting it. And also with people who don't want to pay tax.
Now none of us is fond of authorities or taxes until we try doing without them. Authorities exist to enforce the rule of law under whose umbrella we all shelter and taxes exist to fund all manner of things that are indispensable to a civilised life such as policemen. Cryptocurrencies would seem to undermine all that.
So, in sum, if you believe that some people will always:
a. be credulous or
b. try to get rich quick or
c. have money to launder or
d. try to avoid paying tax
and if none of that bothers you morally, cryptocurrencies may well still be a safe bet.
You be the judge.
