Bitcoin Is A Beautiful Mess

By  Hans Hauge

Bitcoin under fire

In a recent article from The Washington Post, Bitcoin (BTC-USD)(COIN)(OTCQX:GBTC) was called a Total Disaster. The Author of this piece, Matt O'Brien cites the high price volatility, price manipulation, and the insanity of Libertarians who seem to believe that it's possible to live in a society without trust.

I'll save my criticism for now. In fact, let's run with this idea. To tell you the truth, there are a lot of things going on right now in the cryptocurrency space that are real issues, big issues. If you're an investor, then you should care about managing risk. After all, it was Warren Buffett who said:

    “Rule No. 1: Never lose money. Rule No. 2: Don’t forget rule No. 1”. - Fool.uk quoting Warren Buffett

The problems with Bitcoin today

Bitcoin is not an investment for the risk averse. In fact, for many people; investing at this stage might not make sense at all. Here's why:

•     Because of Bitcoin's nature as a bearer instrument, it has become a high priority target of hackers, scammers and thieves. This means that custodial responsibility falls on the user, and usually this doesn't end well. It's possible to lose your private keys, or for a trusted service to get hacked and simply abscond with your bitcoin. Unless you happen to have a high enough net worth to pay a custodian, or you happen to be tech savvy enough to protect yourself from digital malfeasance, you might want to steer clear.
•     Volatility is still very high. In the last month, the price of a single bitcoin has swung from the $8k range to the $6k range. If you need to rely on the USD value of your Bitcoin in the short term, this might not be your cup of tea.
•     In the past, large exchanges have been hacked. Mt. Gox was once responsible for 80% of the Bitcoin trading volume, and in the wake of its insolvency; caused a bear market that lasted for about a year and a half. As recently as last year, it seemed that exchange volume had become more normally distributed, with only 8% of daily Bitcoin trading volume coming from a single exchange. However, recently we have seen a return to insane trading levels; and as I write this, two exchanges make up 58% of the Bitcoin trading volume, this is bad news.
•     Scam bots are now trolling social media, with reports of networks of bots exceeding 15,000 that we know of. What's worse, Twitter seems unable to deal with them, and they're adapting (evolving?) to avoid detection and seem more real.
•     Fake exchange volume now dominates apparent activity. Unregulated exchanges are running rampant and springing up over night.
•     Tether (USDT-USD) trading on exchanges has been conflated with USD trading in come cases. This means that while Tether makes up only 1% of the cryptocurrency market cap, it makes up perhaps 60% (or 80%) of the Bitcoin trading volume each day. Many are skeptical of Tether, which in fact may be a scam, or something worse. Bitfinex, the only place where Tether can be traded for dollars, has been subpoenaed. We're still waiting to see how this plays out.
•     If Bitcoin's transaction growth rate exceeds it's ability to scale the platform, then we will see another hard limit as the number of daily transactions hits the maximum number that the network can process. This happened in 2017, causing a massive run up in fees, making Bitcoin effectively useless for small transactions with an average fee of $20, $50 or more.

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