Opinion: Elon Musk, China, HODLing and “Cryptoqueen” - Why You Shouldn’t Invest in Bitcoin
Cryptocurrencies. Everything that’s confusing about economics combined with everything that’s confusing about technology. Without jumping too deep into the rabbit hole, cryptocurrencies are basically digital tokens that you own that can be transferred and exchanged like money (but are still not accepted as a form of payment in most situations). Unlike most currencies, cryptocurrencies are not issued by governments, but rather by individuals or private organisations. However, like other currencies, cryptocurrencies can be exchanged for other currencies, such as the US dollar or Australian Dollar. Investors in cryptocurrencies aim to exchange their digital coins for more regular currency than they initially paid for, thus creating a profit. Ever since the boom of 2017 when the price of Bitcoin skyrocketed from $1000 to over $19000, cryptocurrencies, or crypto for short, have been thrust into the global spotlight. Some of you may not care about cryptocurrencies or even care about them. Some of you may be very active on the crypto market, making trades several times a day. And that’s alright. But I know that crypto trading can seem appealing, especially to younger investors who are more willing to take risks. Stories of “Bitcoin millionaires” such as Cooper Turley, a 25-year-old who, according to CNBC, has made millions since he first invested in crypto as a university student, have created an entire subculture of people who, eager to make a quick buck, have invested significant amounts in cryptocurrencies without knowing anything about how they actually work. So, to those amongst you who have considered investing in crypto or will consider it in the future — let me make this very clear. Crypto trading is not a secure investment that will make you a profit in the long term. It is gambling and speculation.
The primary reason why cryptocurrencies, even established ones like Bitcoin and Ethereum, are risky and volatile investments is because they have no underlying value. This is different to other investments like gold or shares, which are valuable because that item has value or because that company is profitable. Currencies around the world are valuable because the governments of countries declare that their currencies have value. Cryptocurrencies, which position themselves as both investments and currencies, are in fact similar to neither through this lens. Cryptocurrencies are essentially data, 1s and 0s on a screen, and the only reason they have value is because investors say so. In addition, they have not been declared legal tender in any country except for El Salvador. The International Monetary Fund has criticised El Salvador’s experiment rather harshly and has urged the government to reverse this decision, highlighting “large risks associated with the use of Bitcoin on financial stability, financial integrity and consumer protection”. Importantly, at no point did our Australian Treasury say, “Yes, any time someone wants to bring us Bitcoin, we will give them X number of dollar bills from our reserves.” According to Kevin Davis, a journalist for the Australian Financial Review, “the only possible value of crypto items is that some other gambler may be willing to purchase them at a higher price.” And crypto market sentiment changes very quickly. Between November last year and March this year, the price of Bitcoin dropped from over AU$90000 to just over $55000, a drop of 38%. How many of you are willing to stomach a 38% loss on anything? Clearly, the strategy of buying cryptocurrencies with the intention to sell later is fraught with risk.
And of course, you could lose even more if you fell prey to one of the many crypto scams which have, in the past, claimed over US$80 million in the span of 6 months, according to the US Federal Trade Commission. You may have heard of OneCoin, a cryptocurrency set up by an Oxford University graduate and PhD who claimed that she had created a “Bitcoin Killer”. “In two years, nobody will speak about Bitcoin anymore!” she claimed. People loved her and her vision. The media called her the “Cryptoqueen”. From 2014 to 2016, she raised over $4 billion, according to the Motley Fool.
It was a scam.
Ruja Ignatova was a PhD in law. People trusted her. She was known for her big stage personality and her even bigger promises to investors. People invested thousands of dollars in OneCoin and encouraged their families and friends to do the same. The BBC, who conducted an in-depth investigation of OneCoin, cited a case where Jen McAdam, a Glaswegian who found out about OneCoin from a friend, invested 10000 Euros and persuaded her family and friends to invest a grand total of 250000 Euros. Those are 260000 Euros that would have taken years to earn that will never be seen again.
Dr. Ignatova disappeared in 2017, along with at least $4 billion of investors’ money which will also never be seen again. Fortune Magazine has called it “the largest financial scam ever.”
So why was Dr. Ignatova and her co-conspirators able to collect so much money from investors despite the red flags that were present everywhere? After all, unlike most cryptocurrencies, OneCoin could only be exchanged for real currencies via an internal marketplace which also placed limits on the amount of OneCoins which could be exchanged per day. This stopped investors from withdrawing the funds that they had invested, which should immediately look suspicious. In fact, Ignatova hadn’t even developed a blockchain, which is one of the fundamental features of a cryptocurrency. She claimed she had developed a “private blockchain” which identifies and records OneCoin transactions, unlike Bitcoin and Ethereum which use public blockchains secured by cryptography. This means that investors were not able to check that this blockchain even existed. It didn’t.
It seems like crypto scams such as OneCoin were and are still able to attract investors because cryptocurrencies are very complicated and are only truly understood by the tech-savvy enthusiasts and dedicated crypto analysts among us. It is therefore the non-enthusiasts that these malicious operations target, the father-of-two who wants a better future for his family by placing his savings in an investment that will grow enough to help his children pay their student debts, or the university student looking for a quick buck. By throwing together a bunch of complicated sounding words and acronyms in a webpage, it is easy to make your scheme look legitimate and your company look knowledgeable. Take these quotes from OneCoin’s now-defunct website, accessed via the Wayback Machine:
“By being the first cryptocurrency storing KYC documents in its new blockchain, we set a new industry standard.”
“The centralized model protects its members’ safety and ensures compliance on AML. OneCoin is the first cryptocurrency that audits its block chain [sic]”
I would like to note that I could not find the results of these audits on the website.
“OneCoin is not an ALTCOIN — this means we do NOT use the Bitcoin algorithm with small changes. We decided to use a custom made [sic] solution, which has elements of script and x11.”
From these quotes, it is quite easy to think that this organisation is highly knowledgeable about cryptocurrencies because of their use of complicated-sounding words and acronyms. It is also easy to think that the company is trustworthy and invest your savings in it, trusting that the company is knowledgeable and will handle the technicalities while you watch your profits grow as promised. This is a fatal mentality — like investing in businesses, you should at least fully understand what you are investing in before you put money into it. But with cryptocurrencies, it can be difficult to spot scams and pyramid schemes, especially among newer and lesser-known cryptocurrencies.
Cryptocurrencies’ flaws as investments sometimes overshadow the brilliant innovations and concepts that give cryptocurrencies their unique features such as enhanced security when making transactions. The whole point of cryptocurrencies is to allow people to transfer money securely without having to go through a trusted third party (financial institution), unlike most online transactions. Blockchain, digital signatures, etc. — these are all just cryptographic techniques used in cryptocurrencies (that’s where the ‘crypto’ bit comes from) which mean that, even though the transaction doesn’t pass through a trusted third party, you can trust that all transactions are genuine and that no one can fake a transaction or authorise a transaction in your name. Furthermore, many cryptocurrencies are also decentralised, which means that they are controlled not by a central organisation but instead by a large, dispersed network. Anyone can become a part of this network, and this decentralisation supposedly “gives power back to the people”.
However, while crypto proponents may point to these innovations to justify their backing of and investment in crypto, they still don’t solve the fundamental problem that crypto is not inherently valuable and that a large majority of transactions we make don’t accept crypto. There is no urgent need for governments and businesses to adopt crypto because most of us don’t mind using the AUD. And as long as we in Australia continue to use the Australian dollar for most transactions, Bitcoin’s absurd volatility relative to the dollar — four times as volatile as the Brazilian real and the Turkish lira — renders it impractical.
There are unfortunately multiple instances where this volatility and the price of certain cryptocurrencies have been manipulated. Take Elon Musk for example. In May 2021, he tweeted that Tesla would no longer accept Bitcoin as payment due to the environmental concerns associated with Bitcoin mining, which uses a lot of computer processing power. Immediately after, the price of Bitcoin dropped around 15%. And he didn’t stop there. In June of that year, Musk tweeted a meme about “breaking up with Bitcoin”, and the price of Bitcoin declined a further 5%. And it doesn’t stop at Musk — in September of 2021, the People’s Bank of China banned all crypto transactions in China. Investors reacted by sending the price down by more than $2000.
There is one more thing I need to address. While we have established that investing in crypto with the intention to sell later is fraught with risk, and that you could lose a large percentage of your investment (for example, if you bought Bitcoin at its November 2021 peak), what about those few fervent supporters who buy cryptocurrencies with the hope that they will eventually replace government-backed currencies? These people, known as HODLers (derived from a misspelling of “hold”), never sell and ignore even large price swings. They believe they will soon be able to use cryptocurrencies to repay debts, buy items, and pay for services without ever having to use a single physical banknote or coin.
However, I believe that cryptocurrencies will not replace government-issued currencies around the world for a number of reasons.
Firstly, the fact that many cryptocurrencies are decentralised and their values determined by the free market should worry governments significantly. By being able to control the currencies in their countries, governments can ensure that their monetary policy matches the unique needs of each country. A decentralised cryptocurrency is controlled by no one, and therefore no one can help stabilise the value of the currency if something were to significantly affect its value. Governments being unable to do anything in the event of a crisis would probably result in disaster. It also seems like many world governments agree — Algeria, Bolivia, China, Colombia, Egypt, Indonesia and more have prohibited the ownership of cryptocurrencies, and many more such as India are considering the measure.
Furthermore, the dreams of a “global currency” will most likely never materialise because each country has different economic needs. The euro, a particularly successful example of an intergovernmental currency, nearly failed when Greece, a member of the eurozone, entered a catastrophic recession after the global financial crisis of 2007–2008 which hurt the value of the euro and all the other European countries using it. However, the actions of Angela Merkel and the rest of the EU as well as her demands that Greece pass huge spending cuts were able to bring stability and integrity back to the eurozone. No one, not Angela Merkel, not the EU, not even the USA would be able to bring stability to a decentralised, unstable and volatile currency whose value changes rapidly against both world currencies and other commodities.
Finally, the simple truth is that most of us, in Australia at least, do not feel the need to switch to cryptocurrencies for daily use. First and foremost, money should have a stable value, and the Australian dollar certainly fulfills this requirement very well. The so-called benefits of using cryptocurrencies, such as being able to transfer money without going through a trusted third party, do not benefit the average Australian in any way. If it did, businesses and people would have noticed by now. But most transactions in shops or restaurants don’t accept crypto. We are perfectly happy to use our stable dollar because frankly, the “problems” that cryptocurrencies are trying to solve were never problems for us in the first place. How many of you are vehemently opposed to the idea of transferring money electronically through a trusted third party which actually helps secure your transaction? Probably not many.
Ultimately, cryptocurrencies are basically giant virtual casinos, prices on a screen subject to the whims of Elon Musk and the Chinese Communist Party. It is important to realise that, while cryptocurrencies are really innovative and dare I say, marvels of software engineering and technology, no good investment should be able to be adversely impacted by Elon Musk tweeting a breakup meme. Or think about it this way — crypto price movements are based on a shuffled deck of cards, face down in front of you, where the cards range from a large software company CEO boasting about how Bitcoin is the “apex achievement of the human race” to the U.S. Federal Reserve announcing that they intend to withdraw stimulus from the market, which may not sound like much but earlier this year actually wiped out more than $1 trillion in crypto market value. You know there will be extreme highs and extreme lows. But you don’t know when they will happen. And like any other casino, you know the odds are stacked against you.
The dealer invites you to draw.
Will you walk away with your hard-earned savings intact, or will you fall prey to the whims of the volatile crypto market, as so many have in the past?
Witter O is a writer for College Chronicle, the student newspaper of Scotch College, Melbourne.
Any views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of Scotch College.
