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Bitcoins worthless coin

The percentages are given as as risk neutral probabilities , which is a common financial calculation used to determine the expected values of assets. To give context, Tsyvinski and Liu also calculated chances of government-backed world currencies failing essentially being worth zero U. So bitcoin's 0. Of course, proponents of the technology seem willing to take the risk and see the potential for a large upside.

We think it's a better gold if you look at the properties of money. And what makes gold gold? Bitcoin is actually fixed in supply so it's better than scarce … it's more portable, its fungible, it's more durable. Its sort of equals a better gold across the board," he said in February. In a withering editorial, the Economist recently declared that bitcoin and other cryptocurrencies are useless. These include the lack of transparency and security on their blockchains and difficulties in purchasing or transacting with cryptocurrencies.

The Economist is not the only publication critical of bitcoin. Does this mean that bitcoin, for all its stated noble intentions, is useless? It was originally designed as an international currency and borderless mechanism for daily transactions. Over the years, reports have documented its use in money laundering and illegal activities even as its clunky interface has ensured that consumer adoption remains negligible.

The flip side to this story has been the entry of speculative retail investors who drove up its price to unsustainable levels. Skyrocketing valuations in cryptocurrency markets have changed the dominant narrative surrounding bitcoin. It is no longer considered a medium of daily transaction. Instead, the cryptocurrency is being branded as a store of value, an alternative investment similar to gold.

But the cryptocurrency faces two significant problems here as well. Till date, there have been three bubbles in bitcoin. They occurred in , , and Each time the price has followed a parabolic curve with a sharp increase in valuation that was immediately followed by an equally precipitous decline. The second problem has to do bitcoin checking very few of the basic characteristics of a store of value. Morningstar analyst Kristoffer Inton and his team created a framework to check whether cryptocurrencies could displace gold as an instrument of investment.

They focused on liquidity, functional purpose, scarcity of supply, future demand certainty, and permanence. Except for scarcity of supply, bitcoin fails on the other attributes. All may not be lost for bitcoin, however. Despite the slump in prices, bitcoin enthusiasts point to recent developments within its ecosystem as proof that it may yet make a comeback. Technological advancements hold out hope for cryptocurrency use in retail transactions.

Cross-chain swaps will enable seamless transactions with blockchains for other cryptocurrencies. The bitcoin ecosystem also continues to grow with a suite of products that expand its range of use cases. In addition to trading with bitcoin, you can use it as collateral for loans or buy jewelry with it. Even as the rejection of bitcoin ETFs by the SEC has grabbed headlines, there has been a visible softening of regulators stance. Bitcoin and other cryptocurrencies have become a prominent topic of discussion at Fintech conferences and amongst SEC commissioners.

While the SEC has cracked down on cases of fraud and manipulation within cryptocurrencies, commissioners have also encouraged players within its ecosystem to clean up their act. The result is that some order is beginning to emerge from the chaos of the bitcoin ecosystem.

The formation of self-regulatory organizations for cryptocurrency exchanges is a start. The entry of insurance giants, such as Lloyds of London, into the cryptocurrency ecosystem, is another development that will assuage the concerns of investors, who are otherwise wary of investing in cryptocurrencies. A slew of new investment products, from index funds to retirement accounts, is also making its way into the ecosystem.

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He's convinced that Bitcoin will change the world in the same way that Facebook, YouTube and Amazon have. Plenty of others have followed in Saylor's wake. Bitcoin is the world's first engineered safe-haven asset running on the world's first digital monetary network.

As it turns out, a lot. In , two Yale University economists Yukun Liu and Aleh Tsyvinski published a report titled 'Risks and Returns of Cryptocurrency,' in which the authors examined the risk of Bitcoin collapsing to zero in the span of a day. For comparison, Tsyvinski stated that the euro EUR has a 0.

Others argue that Bitcoin will eventually crash to zero because it lacks intrinsic value. However, although it doesn't have any intrinsic value, Bitcoin is backed by consumer confidence and mathematics. This is somewhat similar to fiat currencies like the US dollar USD and Pound sterling GBP , which were once backed by gold which has intrinsic value , but are now backed by the government—though some would argue that the US dollar, at least, is actually backed by debt.

If Bitcoin were to truly crash to zero, it would mean that it would be either impossible to trade Bitcoin or exchange it for goods and services, or that buy-side liquidity had fallen to zero for some reason. Realistically, one of the only plausible scenarios that could cause this is Bitcoin being banned by all world governments, potentially rendering it illegal to own or use—as is the case in a handful of countries.

This would also require taking down the entire Bitcoin network, rendering all nodes offline—including the ones in space —and making it impossible to set up new ones. This would, theoretically and unless a workaround is discovered , make it impossible to transfer Bitcoin and would prevent underground trading, likely rendering Bitcoin worthless—but this would be nearly impossible to accomplish.

Another possibility is that Bitcoin might simply be superseded by a better cryptocurrency or a similar alternative payment system, rendering it obsolete and therefore worthless as a payment method or store of value. This scenario would, however, likely take several years—perhaps even decades—to play out. Similarly, when the price of bitcoin falls and miners exit, the cost of mining decreases.

However, the number of miners cannot fall below a certain level, because without the miners providing the computing power to maintain the ledger, the bitcoin blockchain will not remain viable. The real concern is that if the price of bitcoin continues to fall, mining will become infeasible, and without enough participants providing the computing power to record the transactions, the transactions will be infeasible and bitcoin will become worthless.

The proponents of bitcoin would argue that we have seen large percentage declines in bitcoin prices before. Miners were providing the computing power when the price of bitcoin was in triple or double digits. But that was a different world — the participants in the bitcoin market were idealists and more interested in changing the world than making a fast buck — and they believed a decentralized monetary system based on bitcoin would enable them to get there.

But the rapid increase in its value prompted traditional investors focused solely on their returns to enter the market. These investors were enabled by the exchanges, which improved the price discovery and liquidity by listing derivatives. So, even though bitcoin has seen sharp declines before, there are three important differences from the recent decline:. If I can buy in a futures market at a price below my mining costs, why would I ever mine for a sure loss?

The blockchain technology is here to stay, but an improved coin might evolve, or governments might start issuing cryptocurrencies — in which case, bitcoin could become a victim of its own success. Atulya Sarin is a professor of finance at Santa Clara University.

Crypto venture capitalist Nic Carter says dogecoin has the potential to harm individual investors, as a number of celebrities and captains of industry have been touting the cryptocurrency that was created as a joke back in Economic Calendar. Retirement Planner. Sign Up Log In. Home Investing Cryptocurrencies CryptoWatch. CryptoWatch Opinion: This is all it would take for bitcoin to become a worthless cryptocurrency Published: April 12, at p.

ET By Atulya Sarin. What is short selling and should you do it?

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In , two Yale University economists Yukun Liu and Aleh Tsyvinski published a report titled 'Risks and Returns of Cryptocurrency,' in which the authors examined the risk of Bitcoin collapsing to zero in the span of a day.

For comparison, Tsyvinski stated that the euro EUR has a 0. Others argue that Bitcoin will eventually crash to zero because it lacks intrinsic value. However, although it doesn't have any intrinsic value, Bitcoin is backed by consumer confidence and mathematics. This is somewhat similar to fiat currencies like the US dollar USD and Pound sterling GBP , which were once backed by gold which has intrinsic value , but are now backed by the government—though some would argue that the US dollar, at least, is actually backed by debt.

If Bitcoin were to truly crash to zero, it would mean that it would be either impossible to trade Bitcoin or exchange it for goods and services, or that buy-side liquidity had fallen to zero for some reason. Realistically, one of the only plausible scenarios that could cause this is Bitcoin being banned by all world governments, potentially rendering it illegal to own or use—as is the case in a handful of countries.

This would also require taking down the entire Bitcoin network, rendering all nodes offline—including the ones in space —and making it impossible to set up new ones. This would, theoretically and unless a workaround is discovered , make it impossible to transfer Bitcoin and would prevent underground trading, likely rendering Bitcoin worthless—but this would be nearly impossible to accomplish.

Another possibility is that Bitcoin might simply be superseded by a better cryptocurrency or a similar alternative payment system, rendering it obsolete and therefore worthless as a payment method or store of value. This scenario would, however, likely take several years—perhaps even decades—to play out. Whatever the case, it is likely that Bitcoin will always retain some value, either as a collector's item or as a historic artifact for future generations.

A similar phenomenon was observed relatively recently, when when the Reserve Bank of India RBI demonetized Rs and 1, notes in November due to a massive increase in counterfeit notes. Although authentic Rs and 1, notes can no longer be used as legal tender in India, they still retain some value as works of art or as a curiosity.

Editor's note: This article was first published in September What remains to be seen is whether bitcoin or a competitor will be that cryptocurrency. Similarly, Myspace, one of the first social-media platforms, was eventually dominated by Facebook and other later arrivals. What went wrong for Webvan is illustrative of one road bitcoin could take. And this disappointment could lead to the demise of bitcoin. In all competitive markets, the price at which a product is sold depends on the cost to manufacture it.

A product can be priced at a premium only if it requires specialized knowledge or intellectual property that prevents other market participants from manufacturing and selling an identical product. For example, you may have a brand that others cannot replicate or a patent without which the product cannot be manufactured. As a commodity, no such thing exists for manufacturing bitcoin and other mineable cryptoassets — with limited technical knowledge, anyone can mine bitcoins. Thus, the price of bitcoin must be close to the fully loaded cost of mining it meaning you are modestly compensated for your time and capital outlay.

Of course, underpinning the equilibrium value is an assumption that there is a use case for bitcoin, the value of which exceeds the cost of mining it. Not surprisingly, the investors who bought at these high prices had losses. But more importantly, the price spike also impacted the composition of bitcoin miners. The high prices attracted miners who realized that they could make arbitrage profits by mining and selling bitcoin in the futures market.

With prices declining, these opportunistic miners are moving away from bitcoin. The cost of making bitcoin is not a fixed-dollar amount; there is a feedback mechanism in mining any commodity. As the price of bitcoin increases, new entrants who want to mine bitcoin enter the market, increasing the effort required to mine a bitcoin, as its reward will be shared among a larger group of miners.

Similarly, when the price of bitcoin falls and miners exit, the cost of mining decreases. However, the number of miners cannot fall below a certain level, because without the miners providing the computing power to maintain the ledger, the bitcoin blockchain will not remain viable.

The real concern is that if the price of bitcoin continues to fall, mining will become infeasible, and without enough participants providing the computing power to record the transactions, the transactions will be infeasible and bitcoin will become worthless.

The proponents of bitcoin would argue that we have seen large percentage declines in bitcoin prices before.

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In a MarketWatch column I wrote last April, I explained what it would take for bitcoin to become worthless. Bitcoin is getting close to that point. That is, without the mining activities supporting the ledger that maintains the records of who owns what — bitcoin is, after all, a set of encrypted numbers that cannot establish the ownership of anything — bitcoin will become worthless. Bitcoin has no cash flows. In that respect, it is more like gold, in that its value is driven to some extent by its desirability and potential uses, but mostly by its cost of mining.

Furthermore, even though traditional commodities like gold require significant investments, with limited technical knowledge and capital, anyone can mine bitcoins. Thus, the price of bitcoin must be close to the fully loaded cost of mining it meaning you are modestly compensated for your time and capital outlay.

So, one would expect the price of bitcoin to fluctuate somewhere around that point. Moreover, there is one additional complication: Unlike gold, which, probably due to a historical accident, is universally accepted as a store of value, bitcoin is a digital commodity with no such universal acceptance as a store of value. While the original buyers and miners of bitcoin were true believers in the paradigm shift they thought it promised, and were willing to make the necessary investments for future gains, the more recent buyers and miners have been run-of-the-mill, greed-driven investors.

Their greed has been further fueled by futures trading, which was introduced when bitcoin prices were booming and the sun appeared to be perpetually rising on the horizon. With bitcoin prices well above the cost of mining, they saw an obvious arbitrage opportunity: Mine bitcoin and sell it for a higher price in the futures market for guaranteed arbitrage profits.

Not surprisingly, traditional investors took notice, with many investing in mining operations, and the bitcoin that were expected to be generated by mining were sold in the futures market. As more arbitrageurs entered the market to exploit this opportunity, bitcoin prices were pushed down close to their cost of mining with a small return and led to a long in bitcoin world period of stable prices.

It also changed the complexion of the miners, and a higher proportion of them are now fair-weather miners looking for a quick buck who would quickly disappear once the opportunity dissolves. Yet the cost of mining bitcoin is not a fixed-dollar amount. There is a feedback mechanism in mining any commodity that applies to bitcoin: as the price of bitcoin increases, new miners enter the market, increasing the effort required to mine a bitcoin, as its reward will be shared among a larger group of miners.

Similarly, when the price of bitcoin falls and miners exit, the cost of mining decreases. However, the number of miners cannot fall below a certain level, because without the miners providing the computing power to maintain the ledger, the bitcoin blockchain will not remain viable. Mining at a cost higher than the cost at which you can sell in the futures market destroys value. So, any rational investor — even one who strongly believes the price of bitcoin will rebound — has no incentive to mine if the cost of mining is higher than the future price and is better off buying in the futures market.

And unlike gold, which can retain its value even if mining activity stops, bitcoin can have no value absent the mining activity that maintains the ledger of who owns it. Absent the mining activity, bitcoin is a just a set of encrypted numbers with no value. And yet bitcoin has climbed more than tenfold since Buffett's warning. Earlier this month, one college friend casually told me over drinks he'd made tens of thousands of dollars investing in another cryptocurrency. He said he hoped it would be worth enough one day to buy a house.

One hundred dollars, or 0. My wife's opinion of me has reportedly decreased by the same amount. Other cryptocurrencies have seen similar spikes, though they trade for much less than bitcoin. There's a long list of factors people may point to in an attempt to explain this.

Regulators have taken a hands-off approach to bitcoin in certain markets. Dozens of new hedge funds have launched this year to trade cryptocurrencies like bitcoin. The Nasdaq and Chicago Mercantile Exchange plan to let investors trade bitcoin futures , which may attract more professional investors. Yet a key reason the price of bitcoin keeps going up is, well, because it keeps going up.

Small investors like yours truly have a fear of missing out on a chance to get rich quick. And when the value of your bitcoin doubles in a week, as it did for me, it's easy to think you're a genius. But you can get burned assuming it will keep skyrocketing. Some investors have likened the bitcoin hype to the dot-com bubble. Others, like Dimon, have said it's even " worse " than the Dutch tulip mania from the s, considered one of the most famous bubbles ever.

As Buffett put it back in , "the idea that [bitcoin] has some huge intrinsic value is just a joke in my view. There's also no interest or dividends. Bitcoin serves as a new kind of currency for the digital era. It works across international borders and doesn't need to be backed by banks or governments. Or at least that was the promise when it was created in The surge and volatility of bitcoin this year may be great for those who invested early, but it undermines bitcoin's viability as a currency.

Related: Bitcoin boom may be a disaster for the environment. Then again, if bitcoin crashes, at least I'll always have the socks. Rather than a currency, bitcoin is being treated more like an asset, with the hope of reaping great returns in the future. So is there anything truly valuable about bitcoin?

Bitcoin is built on the blockchain , a public ledger containing all the transaction data from anyone who uses bitcoin. Transactions are added to "blocks" or the links of code that make up the chain, and each transaction must be recorded on a block.

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