Here’s Why You Should Stay Far Away from Bitcoin

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Regardless of whether you’re an active trader or just someone with internet access, you’ve probably been hearing a lot about Bitcoin. The crypto-currency can’t seem to avoid the headlines right now and it’s because of the incredible growth its undergoing.

In the past three months, Bitcoin has risen nearly 400 percent, going from around $4,000 per coin to roughly $19,500 per coin. That kind of explosive growth has investors reeling, wondering if they missed the boat or if they can still hop on now. But with quick gains comes extreme volatility, with Bitcoin rising and falling more than 10 percent over the course of any given 24 hour period.

As crypto-currencies become more popular with offshoots like Ethereum and Litecoin already following in Bitcoin’s footsteps, investors need to understand what these types of currencies are and what their real worth is.

The idea of value

One of the biggest criticisms of Bitcoin is the fact that it only exists as computer information – there is no physical or tangible asset to hold. But many fail to realize that the U.S. dollar technically falls into the same category. Originally the dollar was a note that was backed by a physical asset – gold. The dollar could be exchanged for it’s equal value in gold and vice versa.

But the modern banking system has moved far away from the gold standard and consumers place their trust in fiat money instead. The dollar isn’t backed by a physical commodity, but is backed by the full faith and security of the U.S. government. They allow the laws of supply and demand to determine value, rather than assign value based on a material.

Despite not being supported by a physical asset, the dollar holds value around the globe. Foreign countries like China hold billions of dollars worth of U.S. treasuries, so keeping the dollar’s value high is in the best interests of everyone.

On the other hand, Bitcoin is not only unsupported by a physical asset, but it’s unsupported by a government. The lack of government might appeal to some consumers, but it also makes it far more volatile and subject to fraudulent activities.

The sudden rise in value might have some investors nervous, but others take it as a sign that Bitcoin is now a bubble that will eventually collapse. It’s reminiscent of the infamous tulip craze that happened in the Dutch republic in the 17th century. Speculators began buying up tulip bulbs and the demand and price went far beyond any kind of real value one could attribute to actual tulip bulbs. Eventually the price became unsustainable with no more new buyers to support the high valuations and the bubble collapsed, leading many to bankruptcy.

Analysts predicting Bitcoin to rise to $200,000 or more are only feeding the bubble. Without any real support, the real value of Bitcoin is best compared to the value of the dollar – that is, only valued by supply and demand. Once buyers begin to taper off, Bitcoin will likely fall, taking investors down with it.