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Sound Advice: August 31, 2022

Is The Game Over For Bitcoins? 

What a roller-coaster ride it has been for Bitcoins, the best known of the cryptocurrencies.  Back on March 9th, 2020, just as the Covid pandemic was emerging, Bitcoin traded as low as 5,385.23.  A bit more than 18 months later, that price soared almost a dozen times higher to 68,789.25.  A number of other cryptocurrencies also had major gains.


Things have changed.


From the peak of last November, Bitcoin has dropped by nearly two-thirds.  Ethereum, another fantasy currency, had an even more exciting ride, zooming almost 50 times from early March, 2020 to the high reached on Halloween last year, followed by a plunge similar to that of the Bitcoin.


There are numerous other cryptocurrencies, most of which seem to have been created by those who specialize in science-fiction.  Here are some of the more amusing names: Polkadot, Avalanche, Chiliz, Helium, Fantom, PancakeSwap, and Basic Attention. 


Cryptocurrencies are digital assets created to circulate securely without the need for a central monetary authority, such as a government or bank.  They cannot be counterfeited.  Though the concern for increased security they provide in currency transfers must be acknowledged, the downside of crypto remains considerable.


For one thing, the interim price swings are huge.  For another, Bitcoins are created by an intensive computerized process called mining.  According to a comparison by the University of Cambridge, worldwide Bitcoin mining consumes more than twice as much power as all U.S. residential lighting.


The main source of value of the Bitcoin is scarcity.  To achieve success, it will have to work well as a medium of exchange.  To date, although there has been limited progress in commercial and international transactions, it has been of minimal value for retail trade.


Bill Gates, the co-founder of Microsoft, described the cryptocurrency phenomenon as something that’s “100% based on greater fool theory.”


N. Russell Wayne, CFP®

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