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Investors, who are looking for legitimate investment, should avoid cryptocurrency

Traditional stock market investors, bankers, and economists have long sounded the alarm that the cryptocurrencies like Bitcoin are no more than sophisticated Ponzi schemes

Bitcoin is all the rage as its market price keeps climbing and investors make record profits from it. As everyday investors begin to form investment pools to get into the hot crypto market, industry observers have begun hawking all kinds of new ways to take advantage of the burgeoning market.

Traditional stock market investors, bankers, and economists have long sounded the alarm that the cryptocurrencies like Bitcoin are no more than sophisticated Ponzi schemes. The scary thing about this investment scheme is that most people investing in it now don’t understand or realise how speculative it is in nature. Meaning, Bitcoin and other cryptocurrencies are essentially worthless. Their value is determined by people with an economic interest selling them for the highest price to the hungry investors.

Bitcoin and other crypto tokens are questionable investments for the following reasons:

• Cryptocurrency is not supported by any resources, real estate, services, or goods.

• Cryptocurrency does not contribute to the economy in any way (e.g., employment, taxation, social welfare).

• The investors are getting a string of numbers in exchange for their fiat currency — nothing else.

• For Muslims, 25 per cent of the world’s population, it is debatable whether investing in cryptocurrency is halal or haram.

No connection to real-world goods and services

Bitcoin and other cryptocurrencies are not connected to any real-world goods and services. That means that they are not affected by the health of an economy or its growth. Consequently, cryptocurrencies are highly volatile and their price movements are impossible to predict and explain. Many industry observers believe that significant price movements, up and down, are the result of market manipulation. Crypto market manipulation is easy because most crypto tokens are held by a small number of investors, usually less than 50. If the major investors decide to sell off their crypto tokens in large amounts, the value of their tokens will sharply decline. They can also drive up the prices with pump and dump schemes.

No societal or economic benefits from cryptocurrency

Cryptocurrencies like Bitcoin were designed to be transferred between the two parties involved in a transaction. There is no government oversight of it, independent audits done to it, or even any transactional gatekeepers to resolve any problems with it. The result is that this alternative digital currency does not positively benefit the society, financial institutions, or economies that it feeds off of for growth. It literally removes money from local economies and replaces it with digital code that can only be spent online with selected businesses. While this may reduce taxation on large transactions, it does not contribute to the maintenance of the investors’ societies, economies, or social welfare. It is the ultimate selfish way to invest and trade because the costs are borne by the public, but the benefits are limited to the parties involved in the transaction. In short, cryptocurrency transactions rely on real-world businesses, economies, and infrastructure to exist even though they do nothing to support it.

Investment similar to the Dot-com bubble

Cryptocurrency investors buy crypto tokens with fiat currency (e.g., USD, EUR, JPY). In exchange for the fiat currency that they can spend in local economies or transfer around the world, they get a string of numbers. The string of numbers is unique and gives them special access to a token with some market value that is based on nothing and backed by nothing. This is the conundrum, how do you invest in a string of numbers that is backed by nothing, produces nothing, and that doesn’t impact your world or the things that have created it.

This investment scheme is most similar to the Dot-com bubble. When the businesses were flocking to the Internet and being given exorbitant valuations, people were becoming millionaires overnight. As the craze hit the mainstream, everyday investors began throwing money at Dot-com companies. When the market finally corrected itself and the bubble burst, many investors were left with nothing, except their shares in a bankrupt online company.

In the case of cryptocurrency, a crypto token dies when people don’t want it. If no one wants it, it has no value. The crypto token owner is then left with a string of useless computer code.

Finally, let’s look at Bitcoin, the legacy ‘coin’. It is basically an algorithm-backed virtual coin. That is to say, it is backed by nothing. The idea that Bitcoin mining creates scarcity and adds value to Bitcoin is ridiculous. Moreover, Bitcoin mining is an inefficient, resource-consuming process that serves no purpose except to perpetuate the Bitcoin scam.

Cryptocurrency’s future

Cryptocurrencies like Bitcoin and Ethereum are likely to continue to exist after the cryptocurrency bubble bursts. And, yes, there will be lots of crypto millionaires and billionaires who will maintain their status because they redeemed their cryptocurrency before the bubble burst.

But, in the long-term, everyday investors will be financially devastated and without any authority to appeal to for help because the crypto market is largely unregulated, lacks a central authority, and is decentralised. This means that you can’t even haul the wrongdoers into court in the jurisdictions where they are legally operating their crypto business.

Investors who are planning for the long-term and looking for legitimate investment vehicles are strongly advised to avoid the crypto market. Its high volatility, highly speculative nature, small group of concentrated token holders, easy market manipulation, and the fact that you essentially only own a string of numbers that are worth nothing makes cryptocurrency a bad if not an incredibly risky investment. Add to that, the market is plagued with ever increasing and evolving fraud.

Cryptocurrency markets operate on the bigger fool theory. As long as there is a bigger fool than you who will pay more for your crypto tokens than you paid to buy them, you make a profit. The problem is what happens when you are the bigger fool and you are left holding the bag.

Hissan Ur Rehman is a graduate of Lahore University of Management Sciences (LUMS) and MBA from UK in Management Consulting. He teaches financial markets in Pakistan. Views expressed are his own and do not reflect the newspaper's policy.