Bitcoin & NFTs: Opportunities or Ponzi schemes?

Why put all your savings in traditional forms of wealth like land or stocks? Why not in non-traditional forms like Bitcoin and NFTs (non-fungible tokens)? These have made millionaires out of first-time investors.

I advise ordinary people to stay away from these exotic new digital assets. Current prices are high and the risk of total collapse to zero is great.

Bitcoins are particularly vulnerable due to green concerns about their energy consumption. But for rich people looking for a way to diversify their portfolios, investing a small portion of their wealth in the new digital systems can be a rewarding risk. Central banks have pumped trillions of dollars into the global economy, so investors with excess liquidity are looking for nontraditional assets. Both the risks and the potential benefits are high.

Objects are worth what people pay for them, not some abstract concept of “true” value. A Leonardo da Vinci painting recently sold for a record $ 450 million, despite fears that it might be a fake. Why is an exact copy of this painting worthless even though it has the same aesthetic value? Because rich people pay for exclusivity – the possession of the original – and exclusivity / scarcity create value for collectors.

Bitcoin, which was introduced in 2009 by “Satoshi Nakamoto,” a pseudonym for one or more unknown people, is a digital currency or cryptocurrency that is privately issued, not by a central bank like the Reserve Bank of India. Thousands of other cryptocurrencies are constantly being created, such as Ethereum, Dogecoin, Cardano, and Polkadot.

In theory, these could be used for payments in lieu of cash, credit cards, or checks, and could save sums of money from intermediaries such as banks. In practice, the prices of cryptocurrencies vary so much from day to day that they represent games of chance, not currency. In theory, you can buy and sell cryptocurrencies, but just ask your servant or grocer and they will refuse such payment. Large bitcoin transactions are made due to the encrypted anonymity of drug dealers and money launderers. This is one reason why cryptocurrencies are banned or restricted by many countries.

FUTURE OR FRAUD? Vignesh Sundaresan, who bought an NFT artwork from Beeple for $ 69 million, is likely a digital billionaire, but many say NFTs could be a pyramid scheme

Internet enthusiasts say that Bitcoin and blockchain (a public distributed ledger running Bitcoin) represent the future and that traditional monetary systems are dying dinosaurs. Cryptocurrencies are decentralized systems that cannot be manipulated by individuals or institutions and have integrated controls of the amount to be spent, which offer protection against inflation. Some idealists believe that cryptocurrencies will free people from unwarranted control by central banks and governments, promote freedom and innovation, and democratize the financial system. The grip of banks and investment banks on money and politics will erode. It will also offer investors a new asset class to diversify into.

However, cryptocurrencies like Bitcoin are “proof-of-work” currencies, where the validity of transactions is confirmed by “miners” who compete to solve complex equations. Miners are decentralized individuals or groups who use high-performance computers, and the winners are rewarded with a few bitcoins each. This “proof-of-work” mining consumes huge amounts of electricity. It threatens to use 5% of all electricity in China, where nearly 80% of all mining takes place. So China cracked down on Bitcoin and the like and threatened their future. However, other cryptocurrencies like Cardano and Polkadot have a different “Proof of Stake” technology that uses tiny amounts of electricity. You can survive even if Bitcoin goes down.

Governments don’t like the idea of ​​private currencies beyond their control. They are likely to make cryptocurrencies illegal or, in practice, very expensive. That remains a risk for those who invest in cryptocurrencies.

Quite different is an NFT, which is little more than a certificate of authenticity for everything digital – it can be a song, a writing or a drawing. It can be replicated by others, but only the owner has the “original” token. Most NFTs are for works of art. The NFT for a collage of paintings by US artist Beeple recently sold for a whopping $ 69.3 million. The buyer was a young digital entrepreneur from Tamil Nadu, Vignesh Sundaresan. He says the NFT is less than a tenth of his net worth, which means he’s likely a billionaire.

Gone are the days when industrial empires were gradually built up with the help of inherited money, muscle strength and influence. You can now digitally innovate to become a billionaire by age 32, like Sundaresan. He may have pioneered a new form of wealth in NFTs.

This could be called a tremendous democratization of wealth that enables youth with no inherited wealth or networks to beat old wealth by creating, buying, and selling new ideas and concepts. You could also call this another huge Ponzi scheme that no one fully understands today. We will see.


Disclaimer of liability

The views expressed above are the author’s own.


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