Bitcoin and the cryptocurrency gold rush

The phrase ‘gold rush’ was coined, for want of a better word, in America at the turn of the 19th century, when rumours of underground gold deposits drew in prospectors from around the world.

However, the underlying principles stretch back thousands of years to the Roman Empire, when ambitious prospectors dug up bare earth seeking golden rewards.

In the modern age, mining for currency takes a very different form.

Instead of shovels and pickaxes, people use computers to complete mathematical calculations which are remunerated with payments in a virtual currency.

Unlike pounds or Euros – known as fiat currencies, despite having no connection to the Italian car company – cryptocurrencies have no substance.

And although some financial institutions will convert the likes of Bitcoin and Ethereum into Sterling or dollars, many cryptocurrencies will never hold tangible value like a piece of gold does.

Instead, they’re traded online for goods and services.

Ironically, they’re often traded themselves as saleable commodities. Cryptocurrency markets are a lucrative – if complex – subdivision of conventional stock exchanges.

But does the cryptocurrency gold rush actually have any substance to it? Or is this simply the latest example of fool’s gold?

Getting the Bit’ between your teeth

Back in 2009, when Bitcoin became the first decentralised digital currency, someone paid two Bitcoin to get a pizza delivered.

Today, those two Bitcoin would be worth £15,000.

If you’d invested in Satoshi Nakamoto’s mysterious cryptocurrency a decade ago (and held your nerve subsequently), you’d have made a vast profit.

However, if you’d invested in late 2017 (possibly in response to a flood of sponsored internet posts about investing in Bitcoin), you’d have lost a small fortune.

In ten months, Bitcoin’s price fell from a peak of almost $20,000 to just $3,500. Since that low point in November 2018, it’s yo-yoed between $5,000 and $10,000 for no obvious reason.

Meanwhile, investing in other cryptocurrencies has brought despair and ruin to many.

Speculative investors and barefaced crooks have collectively overseen the failure of over 1,000 cryptocurrencies, usually after investor money mysteriously disappears.

Dogecoin – started as a joke yet quickly adopted by a large user base – collapsed almost overnight when funds vanished and the founder shut it down.

Now you see it…

The anonymous ledgers recording cryptocurrency transactions don’t record who owns what at any given moment. This is literally an untraceable asset.

That makes it impossible for stolen funds to be returned by police work or investigation, which is why ransomware is often accompanied by a demand for payment in Bitcoin.

And this founding principle of all cryptocurrencies led to ruin for one of the most widely anticipated chapters of the recent cryptocurrency gold rush – Ethereum’s DAO.

After receiving almost $170 million of investments from 11,000 investors, a single hacker took away $50 million and brought the entire cryptocurrency industry into disrepute.

Subsequent arguments about the legality of the anonymous individual’s actions undoubtedly scared many people away from cryptocurrency investments in future.

Because like the gold rushes of the American Frontier, there’s simply no way for an investor to know whether they’re going to achieve anything after their initial investment.

And unlike tangible gold which has a fairly stable market value, cryptocurrency prices yo-yo wildly as stockbrokers and traders buy and sell them at will.

Indeed, it could be argued that trading cryptocurrencies has been the biggest factor in their collective failure to achieve mainstream success.

If traders take a dislike to a currency, there are no banks to underwrite losses, no governments to step in with liquidity, and no recompense if losses are suffered.

Arguably, the whims of investors are a minor problem compared to the security of these unregulated and unsupervised cryptocurrencies.

The world’s largest bitcoin exchange (Mt. Gox) experienced a catastrophic $1 billion theft in 2014, reflecting the riskiness of leaving money in the hands of anonymous strangers.

The Romans also knew a thing or two about taking risks.

Caveat emptor, they said. Buyer beware.