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College Students Love the Bitcoin Market: What Could Go Wrong? Lombardi Letter 2018-04-12 14:07:49 bitcoins crytpocurrencies risk factors Bitcoin system blockchain central authority commodities satoshi nakamoto what are bitcoins Over one-fifth of American college students have invested their student loans in cryptocurrencies such as Bitcoin. But the Bitcoin market is heading into dangerous territory. Analysis and Predictions 2019,Bitcoin,Commodities,U.S. Economy https://www.lombardiletter.com/wp-content/uploads/2018/03/bitcoin-market-150x150.jpg

College Students Love the Bitcoin Market: What Could Go Wrong?

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College Students Could Be Hit Hard by the Next Bitcoin Market Crash

Apparently SAT tests, which are like IQ tests in principle, don’t account for excessive risk taking. Where’s the evidence for this? Cryptocurrencies offer a hint.

You see, over the past few months, more than one-fifth of American college students have invested their student loans in cryptocurrencies like Bitcoin (note a capital B denotes the Bitcoin concept, whereas a lowercase b stands for the currency).

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The Bitcoin market is heading for the danger zone, which suggests that many American students will have to survive on a diet of leftovers and early-bird specials for the next while.

Such has been the siren song appeal of the Bitcoin market (and other cryptocurrency markets) that many college students have decided that bitcoins are better than study. There’s no other way to interpret the data published by The Student Loan Report, which ran a survey asking American college students whether they have ever used their student loan money to invest in cryptocurrencies such as Bitcoin. (Source: “College students use financial aid money to invest in bitcoin,” CNBC, March 23, 2018.)

Cryptocurrencies were no doubt the hot investment item of 2017. Will they continue to be so in 2018? The jury is still out. But students, and young people in general, have a special attraction for bitcoins. They like the idea of a fully digital currency, which they can manage from a smartphone.

Where’s the Bitcoin Roller Coaster Heading?

One of the signs that students should have been smart enough to notice is that Bitcoin’s rise has been anything but gradual, let alone sensible. The biggest jump toward the lofty peaks of the $20,000 record price occurred in the span of a month or two.

At the time of this writing, Bitcoin had crossed the $8,000 floor and was continuing to drop.

Its value has increased 600-fold since 2013, based on…well, that’s the problem. Nobody knows. After all, when there are concerns over interest rates, a lower dollar, or just good old-fashioned risk factors—which warrant flights to safety—gold has fulfilled the role of refuge investment.

Bitcoin might have earned the reputation as the investment that sticks it to “the Man.” But judging from Bitcoin’s recent performance, it’s more than likely to stick it to its fans and speculators.

Is There a Difference Between the Bitcoin Market and Las Vegas?

There’s nothing in the Bitcoin system that would have warranted such a jump in value; it’s speculation of the lowest order. A fifth of American college students have done little more than gamble if they bought bitcoins, starting last December.

They’re gambling because, like most people—even those who have spent tens of thousands of dollars in order to “mine” bitcoins—have no clue about what bitcoins are or what they’re about.

Bitcoin has not recovered since its fall from the peaks of $20,000. It seems ready to drop several ceilings, making it increasingly risky. So it’s worthwhile reviewing what bitcoins and other cryptocurrencies are about.

The mysteries of Bitcoin aren’t just about its appeal or its late-2017 rally; they start at the root. Nobody has any clue about who invented Bitcoin. Yes, some mysterious person going by the colorful name “Satoshi Nakamoto” has taken credit for the invention, which was unveiled in 2009. However, it’s a fun and fantasy-filled name. That should send up the first red flag. The mystery behind the name ensures total anonymity, and therefore a lack of accountability.

This is no accident. After all, bitcoins are literally based on thin air, or, if you prefer, they have a virtual existence only. What we call money or currency is the product of conventions that have taken thousands of years to mature. The first coins, the first idea of money and investments, goes back to ancient Sumer in Mesopotamia (modern-day Iraq). Money was based on real assets like grain or metals.

Paper notes, whether they indicate $1.00, $10.00, or $100.00, are exchanged for goods or other currencies of the same value because the whole world agrees. That’s fiat money (not the car, but “fiat” as in the Latin “let it be”), but it derives from hundreds of years of currency being backed by gold. Bitcoin has no such nobility in its origin.

What Are Bitcoins?

Bitcoin is a digital currency. Its users “save” bitcoins in virtual portfolios. Recently, its users have been able to pay for goods and services in shops and online. But most keep them with the expectation—even more than the hope, given the level of speculation—that their value will increase.

The big target now is Bitcoin at $50,000. But what kind of market decides what bitcoins are worth? Also note that the values they express and all hope to achieve are in dollars. In other words, it seems illogical to use bitcoins as currency, given that its value fluctuates so frequently and so sharply.

The one advantage of Bitcoin is that it works well online; no surprise, given that it’s a digital currency. It appeals also to anarchists who want to believe that we will one day get rid of institutions and the very idea of a state. Indeed, Bitcoin has no governing body like a central bank or a Federal Reserve. The big advantage then, is that transactions are direct—in theory.

There are no middlemen as there are, say, when you or Satoshi Nakamoto use a credit card. The ultra-secure system that allows Bitcoin transaction to work, the so-called blockchain, reduces the chances of identity and credit card number thefts.

Yet, as easy and as great as bitcoins sound, the blockchain system—which is too complicated to describe in a single article—has nothing to do with their value. Blockchain simply verifies that transactions are valid and that the bitcoins aren’t stolen (virtually, of course).

Then we enter the problem of the Bitcoin mining. The term “mining” implies that bitcoins are rare and that they have some kind of source,  just like gold or silver.

The Bitcoin system has set a limit for itself of 21 million. To control inflation—that is, the number of bitcoins in circulation—the total will not exceed that number. However, the Bitcoin system distributes fresh currency in the form of cryptographic problems.

These have become ever more complex mathematical operations that need an ever-growing number of computers to resolve. There are literal computer farms working day and night, using as much electricity as some small countries, to resolve Bitcoin problems. The first to resolve these problems is rewarded with a new Bitcoin, which the blockchain confirms and adds to the ledger for all to see.

“Bitcoin” Is Just Another Word for “Bubble”

The value of bitcoins is based purely on supply and demand, like everything else in the capitalist system. But, given that there’s no central authority or history behind them, bitcoins are technically worth whatever its users agree they are worth.

The reason Bitcoin values rose so sharply in 2017, however, owes to the fact that some real market legitimacy was infused. The Chicago Mercantile Exchange started to trade Bitcoin as futures. That is, investors can bet on how much bitcoins will be worth. In other words, they’re trading bitcoins as they trade pork bellies or orange juice futures.

This may have helped raise Bitcoin’s commercial reputation, but it has done nothing to mitigate the risk. Imagine for a second that your college kid is investing his or her loans in bitcoins. Does that inspire confidence?

If the January Bitcoin crash hasn’t yet raised doubts about Bitcoin’s reliability, the current crash might. The risk of Bitcoin being in a bubble is extremely high. Prices are not sustainable in the long term, nor do they have any reason to be.

It’s no longer even a matter of describing bitcoins as the currency of choice for criminals, who enjoy the anonymity of the transactions. Harvard Professor and former International Monetary Fund (IMF) official Kenneth Rogoff says that Bitcoin’s value is based solely on the hope of its “investors” that its value will go up. (Source: “A decade from now, bitcoin is more likely to be $100 than $100,000, Harvard economist says,” CNBC, March 5, 2018.)

There’s nothing wrong with that. Such is the way that futures investing works. Oil, wheat, potash, and currencies work that way. But the latter have some form of communication that can help predict their value. They also have uses beyond the “hope.” Oil is still the resource that allows the world to function, while potash is essential for agriculture, and wheat is essential food.

Exactly what bitcoins are essential for, nobody knows; not even Satoshi Nakamoto.

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