With Bitcoin probing new lows in its 9-month-old bear market, I am starting to get deluged with questions from readers as to whether it is time to buy.
My answer is always the same.
I wouldn't touch it with a 10-foot pole. I wouldn't even buy it with Donald Trump's money.
Bitcoin was a great buy at $1.00. At $6,000? Not so much. At the December $20,000 high? Yikes!
The inquiries are being driven by analysis from friends of mine, such as Tom Lee of Fundstrat, concluding that the theoretical value of Bitcoin could be as high as $50,000.
These are based on some obscure calculations of Bitcoin's value relative to the size of the global monetary base.
By the way, the same calculations done elsewhere suggest that gold (GLD) should also be worth $50,000 an ounce. Today, gold is trading at a lowly $1,218.
Here is the problem that I have with all cryptocurrencies.
The security is terrible.
When your Platinum American Express card is stolen, you just conveniently call the 800-number listed on the back of the card.
Not so with cryptocurrencies. When it's gone, it's gone. There is no recourse anywhere.
According to Chainalysis, a New York-based firm that sells ant- money laundering software, about 10% of all outstanding cryptocurrencies were stolen last year worth about $225 million.
More than 30,000 investors have fallen prey to ethereum-based scams alone, losing an average of $7,500 each.
The security for Bitcoin is no better.
There are in fact 32 cryptocurrencies now trading online, including Auroracoin, Dash, Gridcoin, Primecoin, and Zcash.
Most of these are originated abroad, often in countries with no U.S. extradition treaty.
New cryptocurrency issuance is expected to exceed $1.6 billion this year.
There is no limit. The number of cryptocurrencies that can ultimately be issued is infinite. Think of them as modern-day tulips.
According to the FBI, cyber-fraud in the U.S. topped $390 billion in 2015. Retired FBI chief Robert Mueller once told me that the bulk of all American crime now takes place online.
It is THE preferred method of picking your pocket.
Cryptocurrencies most often fall victim to the phishing scams by crooks posing as legitimate cryptocurrency creators, or "miners" as they are known.
Once the victims open up their digital currency accounts, they are cleaned out.
It doesn't help that cryptocurrencies have become the currency of choice for a number of criminal enterprises, including those employing ransomware attacks.
About 99% of the daily trading volume in Bitcoin takes place with Chinese counterparties.
They need it to sidestep strict foreign exchange restrictions and capital controls.
The average Chinese is not allowed to take more than $50,000 a year out of the country. Extensive disclosures on the use of funds are also required to discourage money laundering.
Bitcoin has also been popular in other emerging countries where the convertibility of their own currencies is either sketchy or nonexistent.
It is possible that cryptocurrencies and the blockchain technology they use have a role in the financial system in the future. I'm thinking the FAR future.
However, massive investments are first required in infrastructure and security. The technology needs to mature.
When online commerce first emerged in the mid-1990s, I was similarly suspicious.
I used a low-limit credit card for my first Amazon purchase, even though I personally knew the founder of the company.
That way, if my card got stolen, the loss would be manageable.
I may take a similar approach to cryptocurrencies in the future. Again, in the FAR future.
Personally, I would rather buy gold if a currency alternative was my inclination.
For a much more extensive discussion of Bitcoin specifically, please click here for "Is There a Bitcoin in Your Future."
