Bitcoin is not only challenging the traditional banking system, but also turning a lot of heads. The public has realised the power of decentralisation and are eager to get their hands on the underlying instruments and derivatives. Trading volumes are going through the roof and the trend is supported by ample amounts of market cap as well. Witnessing a parabolic trend is not something new for the volatile Bitcoin.
However, there are few concerns about the longevity of the trend and a lot of experts have expressed conflicting perspectives. In this article, we are going to be focusing on the way this digital currency works and also the points made against it by famous economist Nassim Taleb. Nassim Taleb is the author of the book called “The Black Swan” and he predicted a possible pandemic in early 2007.
While some people might call predictions like the one mentioned above pure coincidences, the data suggests against it. BTC has a long way to go before it becomes an actual possible reserve currency. Current volatility swings makes it impossible to consider that as a store of value. The investors that are holding for the long term might disagree, but it is too early to make any claims about the future.
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Regardless of whether you are a daring bull or a concerned bear, go through the following information to know the arguments from both sides. Remember, not to get involved with this asset with borrowed funds and always invest only the kind of money you are comfortable losing.
What is Bitcoin?
Bitcoin is nothing more than a virtual currency and it is built via blockchain technology. This asset is sometimes referred to as digital gold and at the time of publishing this post, the cryptocurrency is ranked number 1 in the world with a market cap of over 1 trillion dollars. The main element that Bitcoin brings to table is the decentralisation aspect. In other words, the main idea of this coin was to enable people to send money to others without having to choose the traditional banking systems.
No person can stop the users from sending money to one another and the anonymity is present to a greater extent. In the initial days, crooks loved this payment method as it provided them with an additional degree of security. However, things have changed drastically from then and presently, BTC transactions are easily traceable. For people that were early in the adoption curve, without any doubts, this asset made them a fortune.
Nonetheless, with the current price, one has to be really determined to buy the coin for the long term. If you have made up your mind, then consulting a financial adviser before pushing the buy button is certainly a good idea. Remember, risk appetite differs from one person to another and it is up to you, the end customers to decide the kind of tolerance level they want. On the flip side, if you are buying cryptos just to keep a diversified portfolio, then the risk is going to be very minute and on the long run, the odds might be in their favor.
Is it Really a hedge against Inflation?
Economy, cash flow and inflation are metrics that are inter-connected at a deep level. If one changes, then all the others have to rebalance themselves and until the equilibrium point is found, it creates room for opportunities. Inflation is a silent killer and using history as a guide, one can easily say that it is the main culprit behind the reduced purchasing power.
Nassim Taleb argues that inflation and Bitcoin show no correlation and he even says that there is no connection between the two. For any commodity including precious metals, the reason they go up in price over time is inflation and the existing interest rates. Interest rates and inflation also have a lot in common and they most of the time move in opposite directions. Coming back to the initial argument, the findings and the data is clear on the economist side.
However, it does not mean the crypto world will be dead. BTC has solutions to many of the flaws in the monetary system, but it is not possible to predict whether it is here to stay for the long run. Though the virtual coin has gone up by a huge unprecedented margin, it does tend to experience steep drops as well and technical analysis clearly does not give an edge.
Not to mention, even the founders of this coin are still anonymous and as it creates a lot of room for error in terms of taxation and other related fields, even the governments around the world are banning them. We are not saying that this coin does not have enough potential to beat the odds.
Our main goal is to make people aware of the risk so that they can adjust their positions accordingly. After all, believing in hype created by the media is never a good thing and if one does not understand the basics of this sector, then the whole venture is nothing more than pure gambling.
Merits of the Bitcoin
There are a lot of new things that blockchain technology brings to the table. Out of the massive list,the main things you need to know about are the anonymity, decentralisation and speed elements. Before the inception of the cryptocurrencies, if people wanted to send money either domestically or internationally, the process involved was tedious and slow.
There were a lot of intermediary entities and any one of them could stop the transaction at any time. Moving big amounts without letting the governments know about it was near impossible and in short, they had too much control over the flow of funds. Bitcoin particularly addressed all the problems mentioned above.
All the transactions done through this form of payment are anonymous, have no centralised figure that can stop the transfer and it is faster compared to wire transfers. Now, a lot of alt coins have come up and they are trying to solve other important issues in the financial world. At the end of the day, the possibilities presented by blockchain technology are huge and only time can tell us how far the entire thing goes.
Nassim Taleb On Bitcoin
Whenever a famous or notable personality makes a statement, it affects the market sentiment to a huge degree. Recent bull trend of Dogecoin after Elon Musk’s tweet is the best example to explain the power well known people have. Nassim Taleb has explored a lot of interesting elements in his career and his book “The Black Swan” holds a high ground in the finance sector. He predicted the possible pandemic with more than acceptable accuracy.
In the early days of BTC, even Nassim Taleb was an optimistic buyer, but he switched gears once he realised the truth behind the virtual currency. He argues that it has nothing to do with inflation and he also strongly believes it is no way comparable to gold as it according to him does not act like a store of value. There are few other experts in the sector that have the opposite views, but in the end only one side can be right.
You might be inclined towards the bulls or the bears, but we strongly advise you not to go all in only on this coin. The social media have glorified the bravery of people that made millions by going all in, but they do not show the 99% of the other scenarios wherein people have literally lost everything.
So, be cautious and when it comes to picking a bias make sure you have some sort of mathematical edge before proceeding forward and always give plenty of margin for error. Keep in mind that the market is a zero sum game and that means if one wins, someone on the other side has lost money.
Volatility and Current Trading Ranges
One of the main reasons as to why economist Nassim Taleb believes that Bitcoin is not a good store of value is the volatility factor. In the traditional stock markets, double digit gains or loses are rare for the indexes and main companies. However, in the crypto world that is a common occurrence and BTC is no exception. In the past BTC has experienced several 50% to 90% drops and that makes it a very volatile asset.
To navigate this space, individuals have to be extremely skilled and it certainly is not for someone that believes in the conventional approach. Current trading ranges involve a support zone that is around 30% from the all time highs. The windows between the ranges are huge and technical analysis is not something that Bitcoin has respected many times.
If you are fixated on trading BTC instead of buying it as an investment, do establish a leg on the derivatives as well to keep a firm grip on the risk. Volatility factor alone might attract a lot of newbies as they are generally biased towards seeing only the opportunities. Sadly, most of them will never survive for long and recent liquidation numbers are proof of that. Selling options is a lucrative opportunity, but again it carries a lot of risk and requires monitoring at frequent intervals.
A lot of billionaires call Bitcoin a pure “Greater Fool” theory. They think the price is getting pumped only because the next person is willing to invest more, though it does not have any kind of intrinsic value. Moreover, the hype from the social media platform is also on the rise and for newbies specifically everything might be overwhelming. The fear of missing out also has caused a lot of parabolic moves in the top cryptocurrencies and the entire sector is due for a correction.
Whether the bull run continues or not is an entirely different question, but things do look bleak for now. Governments are against the virtual currencies and they for all the right reasons do not want to give up control. On the other hand, few elites are heavily invested and the tug of war between the bulls and bears is a tight one. The battle indeed is very entertaining and thanks to the liquidity everyone can get a piece of the action only if they are responsible enough.
As far as mining is considered, the difficulty ratio is more and considering the costs involved, it is hard to sustain, grow or scale. So, do your homework carefully before making a financial commitment and for best results always consult a licensed financial adviser. This article is intended for general information and entertainment purposes only and nothing said here can be constituted as financial advice.