Regulator warns Bitcoin buyers: Be ready to lose all your money

Reading this article was tough not to laugh at but just as challenging to not want to scream out on points that are very misunderstood. The article contains numerous statements from British banker and head of the Financial Conduct Authorty and he either doesn't get Bitcoin and cryptocurrencies at all, or he understands it clearly and doesn't want to see cryptocurrencies turn banking on it's head. I will let my running commentary help to shine light on the issue. In theory people like this should fully understand what Bitcoin is by now and anyone in banking should fully understand it if it is indeed a threat to the banking industry. Every time a prominent investor or advisor makes a statement of why to avoid Bitcoin, months later they are seen contradicting earlier statements and investing in it.

My comments are embedded throughout the article.

Article: Regulator warns Bitcoin buyers: Be ready to lose all your money
By: Kamal Ahmed
Economics editor

The head of one of Britain's leading financial regulators has warned people to be ready to "lose all their money" if they invest in Bitcoin.

Bitcoin or any cryptocurrency is not immune to a crash or being in a bubble but understand many investors have said the same previously but changed their stance after doing research. Research what blockchain is, how Bitcoin works, how mining works and you'll realize it's the power of banking in your hands.

Andrew Bailey, head of the Financial Conduct Authority, told the BBC that neither central banks nor the government stood behind the "currency" and therefore it was not a secure investment.

It isn't a secure investment but then again what is a secure investment. A few percent gain on your money is easier to secure or guarantee than the unknown.

Buying Bitcoin, he said, was similar to gambling - and had the same level of risk.

It is like gambling to those that are not educated on what cryptocurrencies are and how they work. As more people learn about it, more people are going all in because they realize how many is probably going to be changing.

"It's not a currency, it's actually not regulated in its Bitcoin form," Mr Bailey told me in an interview for Newsnight.

  • "It's a very volatile commodity in terms of its pricing.
  • "If you look at what has happened this year, I would caution people.
  • "We know relatively little about what informs the price of Bitcoin.
  • "It's an odd commodity as well, as the supply is fixed.
  • "If you want to invest in Bitcoin be prepared to lose your money - that would be my serious warning."

The point of Bitcoin is to avoid regulation and manipulation. Governments and banks have less control over cryptocurrencies than they do with FIAT currencies so you can say with regulation there comes a price.

Bitcoin is very volatile.

To state that we don't know what informs the price of Bitcoin, again this is part of the design of it in that people, governments and companies have less influence on the price. If anything, the price of Bitcoin is determined by the exchanges and the market demands. It simply is worth what people are willing to pay for it and as it grows, more people are still willing to buy.

The supply is fixed! This is a good thing as a non fixed price of Bitcoin would lead to inflation, which most cryptocurrencies inherently avoid. A government can choose to pump more FIAT currency into the economy but with Bitcoin, the amount of Bitcoin that exists is fixed. If anything as time goes on, your FIAT currency depreciates via inflation while Bitcoin has done the opposite.

Mr Bailey said that financial regulators did not oversee "commodities" and that he was not immediately pressing for a change in the rules.

And he denied that regulators were being left behind by the new technology of cryptocurrencies.

  • "The decision on what we regulate is appropriate for government and Parliament," he said.
  • "It would be for Parliament ultimately to make that choice if it wished to do so.
  • "I don't press for that providing people understand very clearly this is a very volatile commodity.
  • "[But] if parliament wants to go further we will happily provide the evidence we have and will support the decision they want to take."

Bitcoin's soaring value

The cryptocurrency has grabbed the headlines this year after its value soared.

A year ago one Bitcoin was reported to be worth £580 on CoinDesk, a cryptocurrency news site.

Today it is worth £12,400.

Such a rapid rise in value has led to increased interest in the "currency", with retail investors buying Bitcoin online and via specially configured ATMs.

There are some people that are nearly panicking to buy fearing they will be missing out on the gravy train and there are others that felt they have already missed it. Of course there is another group that feels this is a bubble waiting to crash.

The head of the central bank of Australia, Philip Lowe, described it as a "speculative mania" and many believe the present valuation is not sustainable.

Anybody that works in traditional banking has a fear of Bitcoin because it completely undermines what they do. They are possibly right about the sustainability, this is the unpredictable nature of Bitcoin.

If the price falls rapidly then many investors could be left with big losses, particularly as it can take as long as 15 minutes to execute a sale - a long period in financial exchange terms during which the value of Bitcoin could fall dramatically.

This is true if there is a major collapse. However knowing how volatile things are, if people are looking to sit on their money and not do much in terms of trading then it's best to ride out the waves.

Andrew Bailey, head of the Financial Conduct

I asked Mr Bailey whether the use of the term "currency" was misleading.

"By adopting the name of cryptocurrency there is a risk that some people regard it as the same as what an economist would call a fiat currency," he said.

The idea of Bitcoin was to replace FIAT currency. The current version of Bitcoin is not ideal as it is slow with high transaction fees. Once these issues are remedied, it's hard to imagine currency being anything else but digital.

"A fiat currency is backed by the state and that's what preserves the value of the currency through the actions that central banks take.

As much as a state can help preserve a currency's value, or at least try to, a state can also do the opposite to manipulate it and devalue it. A state backed digital currency is really no different than a FIAT currency and this is where people won't be rushing to transfer their wealth into. If you were do to this, it's the same as what you have with banks right now so you have inflation to overcome and you're required or expected to have the bank control your money and give you a few percent ROI for interest.

"Bitcoin is not that - it's not a currency."

Bitcoin might not be the ideal currency at the moment for slow speeds and high transaction fees but it definitely is a currency.

Bitcoin, which is created virtually, is anonymous, unregulated and has been used by criminals to launder money and demand ransoms.

Bitcoin can be anonymous however many people don't realize that every Bitcoin transaction is publicly listed in a ledger. So you could actually look up transactions through the history of Bitcoin and find the addresses of the sender, receiver, amount sent and time. It is up to the user if they choose to try to remain anonymous in the whole process or not. It is unregulated by design and unfortunately, it is used by criminals.

Its supply is also limited and its creators, believed to be a group of coding experts, have said that the number of Bitcoin will never rise above 21 million.

At present there are around 16 million.

By putting a limit on the number of Bitcoins, it means nobody can simply inject more into the system, which if that happened, it would devalue the coin on the spot and make it like a FIAT currency where governments and banks do create more currency which causes inflation.

This week, the price of Bitcoin rose again as the first officially regulated financial exchanges in America started to allow investors to speculate on the future price of Bitcoin.

Now this is what I call gambling, regulated gambling! Actually it could be a lot worse. This is going to be feeding the binary options industry which is already loaded with fraud.

Such futures trading is regulated across the world.

  • "If you buy a future or if you buy an option then we do come into the picture," Mr Bailey said. He admitted that it was unclear who was buying Bitcoin as the system was anonymous.
  • "You can't go somewhere and look up the record of who owns Bitcoin," he said.
  • "If I thought there was evidence of people saying 'you know what? I'm going to put my pension into Bitcoin' - I would be very concerned but we don't see that at the moment."

Should you put your pension or life savings into Bitcoin? Probably not although some people are doing that and quite happy they did.

Closing Comments

If Bitcoin existed back in 1998-2002 when Argentina's economy was melting, you'd bet that people would have been withdrawing their money and converting it into Bitcoin as fast as they could. What happened was the government and banks didn't want people to withdraw all their money at once and forced people to not do this. Their currency inflated completely out of control and poverty skyrocketed.

The same thing is more or less happening in Venezuela as their Bolivar currency is in a death spiral as they just announced they have new 100,000 bolivar notes.

In November this article was published which said the 100,000 bolivar note was worth $2.50 USD.

Now it is worth a fraction of that.

Just look at the history of hyperinflation to see what happens when you do pump too much money into a system.

To answer questions if this is sustainable or rather that if this is indeed a bubble, when will it pop? If this truly was a bubble, it would have crashed long ago until getting to this point. Why would Bitcoin go from $1k to $2k, to $5k, to $10k to $15k and higher? If this was a ponzi scheme or a giant bubble, there's no good reason it would be continuing to grow. Cryptocurrencies haven't even come close to hitting their peak yet. Just wait when the day comes where people can buy things online with things like Bitcoin Cash or Ethereum. There are more investment companies that have done their research and one by one, they are moving into cryptocurrencies. It is their old school mentality that has kept some of these companies from investigating what this is all about but once they do finally research what the buzz is about, they realize that this isn't a ponzi scheme at all but it is the potential to change the way we do banking forever and traditional currencies as we know it could simply disappear.

Final comments on traditional banking

Banking is already feeling threatened by the tech industry as companies like Amazon, Apple and Google are able to get banks to bend to their needs. These companies have the direct control of the consumer and they have the power to offer their own payment methods and lines of credit thus treating the bank like a middleman and that is already a threatening proposition.

Ecommerce was the top threat to the banking world and there are numerous articles that articulate why banks probably know they are going to be forced to adapt to a new reality.

If that wasn't enough, cryptocurrencies are next in line and if eCommerce wasn't going to take down the banking industry, cryptocurrencies will at least do that on their own.

  • For any currency around the world that is experiencing any type of inflation, people are incentivized to put it into a cryptocurrency that is somewhat immune to inflation
  • With Bitcoin, you are your own bank. You literally don't need a bank for anything
  • Companies like Visa, MasterCard have made a lot by being a lender and charging for processing fees. Their processing fee business is severely at risk with things like Bitcoin Cash at under 20 cents a transaction whether you want to send $20 or $20 million to any other person.
  • Western Union: why would people use WU to send money around the world anymore and pay very high fees to get this done
  • The war on transactions won't be fought with banks and cryptocurrencies, it will be with eCommerce sites and cryptocurrencies
  • Why do you think Amazon bought some crytpocurrency domains?

Can't touch this