- Alex Pickard of Research Associates says many bitcoin investors don’t understand what the currency is today — and says he didn’t, either, when he quit his former job to became a bitcoin miner.
- Pickard says that today, bitcoin is no longer a cash system and is a purely speculative asset. He adds that its large price fluctuations mean it doesn’t work as a hedge against inflation either.
- While bitcoin prices appear to be in a bubble after quadrupling in the last year, Pickard says there’s also manipulation at work — something that could cost investors dearly.
- Visit Business Insider’s homepage for more stories.
Alex Pickard uprooted his life for bitcoin years ago, and he’s come back with some lessons.
Pickard wrote this month that he first invested in bitcoin in 2013, when he was 25 years old. It was a small investment, and it worked well. As he learned more about the digital currency, he grew more enthusiastic. He made a much bigger investment in 2015, at prices he says were between $400 and $700 per coin.
Bitcoin prices fluctuated over that stretch and then began to soar. Pickard writes that he gave up his job in quantitative finance and moved to Washington state. He bought a bitcoin mining rig to earn more coins, and to maximize his profits, he settled in a town near a hydroelectric power plant that provided the cheapest electricity in the country.
In late 2017, bitcoin topped $15,000, and Pickard says he was earning thousands of dollars a day. But he had to stop mining bitcoin in January 2018 because his computers were straining the local electrical grid. Not long after, prices started dropping. Late that year they would nosedive 80% in eight weeks.
This is far from a sob story. Pickard made a very healthy profit on his investment, and today he’s the vice president for research at Rob Arnott’s firm Research Associates. He tells Insider he’s owned the currency on and off since then, although he currently owns no bitcoin and does own a small amount of a spinoff cryptocurrency, bitcoin SV.
But there are a few things he thinks investors should know. They might be more relevant than ever today, with bitcoin skyrocketing again. As of Thursday, a coin was worth about $38,500, double its value a month ago and more than 340% above its price one year ago — and Pickard is deeply skeptical it can stay there.
Here are three things he thinks bitcoin investors need to know.
(1) Bitcoin is a vehicle for speculation
Pickard stresses that investors need to understand what they’re investing in, and with the benefit of hindsight, he says he didn’t really understand bitcoin.
Today, he writes, the currency is “a vehicle for speculation. It is not a vehicle for investment, not a store of value, and not an inflation hedge.”
Pickard says bitcoin’s enormous volatility, which lately has included daily swings of 10% and 20% up and down, means it can’t be anything other than speculative. Speculative investments might have a place in an investor’s portfolio, but they should be understood for what they are and approached with healthy caution.
He also differentiates it from assets like gold as an inflation hedge. While bitcoin might not lose worth because of inflation, its unpredictability means it won’t protect investors from the risk of inflation. He notes that it’s gone through huge gains and huge losses at times inflation has been constant.
But Pickard also has his eye on a darker possibility, writing that the price of bitcoin “is nearly certainly a bubble and likely manipulated.” He references a theory that Tether, another cryptocurrency, is being used to drive up bitcoin prices.
“If Tether were to be shut down, and if, in fact, artificial demand from Tether was supporting the price, the losses from a BTC crash may not be recoverable,” he said.
(2) It isn’t untouchable
Pickard writes that many people believe bitcoin has fortress-level security as an asset because it’s purely digital. Specifically, they think it can’t be seized by a government. But that simply isn’t true. There have been numerous criminal cases where exactly that has happened.
There’s an upside to this, because it hits at bitcoin’s purported links to criminality: Pickard says that because every transaction is precisely and publicly logged, bitcoin is actually a bad tool for criminals. But in either event, a person or company’s bitcoin can be taken away.
(3) It’s not cash anymore
It might sound like a philosophical point, but Pickard says bitcoin’s entire reason for existing has broken down because of technical changes. That doesn’t mean it can’t work as an investment, but he writes that it is “no longer a digital cash system” as intended by its creator, known as Satoshi Nakamoto.
“No longer can Amazon or any other online merchant adopt it for use as a medium of exchange,” he said, as a result of those changes. “Essentially overnight it became “digital gold” with no use other than for people to buy and hodl (a misspelling of “hold” that was first used on a message board in 2013).”
Instead, bitcoin exists only as an asset people buy in hopes someone else will want to pay more for it later. The intriguing nature of cryptocurrencies and their escalating prices have attracted heavyweight individual investors and big banks and funds because the return is hard to argue with.
But no matter how enthusiastic people are about bitcoin as a concept or its price gains, Pickard says those qualities don’t make it a functional currency. Their reluctance to spend it, and businesses’ hesitation to accept it, would get in the way.
He says that electronic cash transfers were slow and expensive when bitcoin was created. But today, digital payment systems are cheap, simple, and widely used, while bitcoin transfers are comparatively expensive and its network can’t handle many transactions, making it much harder to buy things with bitcoin.
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