I got the text around the start of the year.  Some of you have gotten the same text.  Mine came from an old friend who works in the financial industry – but he was far from the only person asking this question:

“Hey – do you want to invest in Bitcoin?”

Going back over a year I had heard about blockchain – particularly the applications to the digital advertising industry (where I work), but I had never seriously considered investing in any crypto currencies.  Also – I wasn’t really sure I understood what a BitCoin was or why it was so valuable – so I took some time, talked to a few people, and really tried to understand what was going on under the covers.

After a few days of research, I could confidently say I think I understood it.

I work in tech… and after a few days I got to “I think I get it”.

However, the more I learned about Bitcoin the more skeptical I became about it’s prospects and all crypto currencies.  I also learned that the first text I got: “do you want to invest in Bitcoin?” was actually critical piece of what makes bitcoins so valuable.

Before I go on, let me pause and say that Bitcoin (and all crypto currencies) are really cool in concept.  The prospect of a totally decentralized banking system where transactions are free and frictionless is, I believe, world changing.  But – I don’t believe that’s actually what’s going on today in the crypto currency market.

Here’s what I understand is actually going on here today:

Behind a thick layer of technical jargon (which serves to either impress, confuse or both), the crypto currency market – today – is essentially a massive unregulated junk bond market.  Yes, there are people buying into crypto currencies to invest in the possibility that there could one day be a new banking world order – but at the same time there are LOTS of people doing nefarious things to manipulate prices of these assets.

Remember – there is no regulation, so there is nothing to stop people from:

  • Pumping and dumping: marketing/talking up a crypto currency to new investors and then selling after the price spikes – (remember that text I got at the beginning of the post ??)
  • Buying practically all of the outstanding currency for a specific coin (cornering the market) and price fixing
  • Colluding with other institutions to price-fix
  • Selling a single asset back and forth between two institutions at escalating prices to fabricate growth
  • Etc.

I’m sure there are all sorts of other dirty tricks going on here that I haven’t even thought of.

At the end of the day, being a Bitcoin investor reminds me a lot of a friend of mine who used to be a professional Poker player.  He said that yes, there are Poker tournaments, and those can be fun – but the only real way to make a lot of money playing Poker is to find people who are new to Poker and have no idea what they’re doing and take their money.

So yes – in Bitcoin investing there are people who are making a lot of money (just like there are Poker players who make a lot fo money) – but they’re doing it mostly by taking advantage of folks who don’t know any better.  I’m not going to say it’s not legitimate capitalism, but it’s definitely not what it appears to be on first glance.

Hey – Do you want to invest in Bitcoin?
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