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Thinking of finally investing in bitcoin? You really need to read this

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A depiction of the cryptocurrency Bitcoin
Image source: Getty Images.

WhilebBitcoin and other cryptocurrencies might not be hitting the major headlines very much these days, I have been noticing insidious new developments of late.

What happens is a new cryptocurrency comes along, with the frequency of Initial Coin Offerings rising alarmingly. In fact, there are an estimated 1,500 individual cryptocurrencies in operation these days, traded on nearly 200 exchanges around the world.

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Ramping

And they’re being ramped all over the place. Reddit seems to be a popular place with its /r/CryptoCurrency/ forum, but they’re turning up everywhere. Just following a couple of links, I find technical analysis gibberish from short-term cryptocurrency traders, to ludicrous claims of why cryptocurrencies are better than trusting the corrupt conspiracy that is the banking system, and so on.

It’s become so bad that even Wikipedia has introduced emergency measures to try to curb the spread of cryptocurrency ramping. What happens is that a new currency, let’s call it DoshCoin, is launched. The next thing you know, you get a new account called something like DoshCoinTruth which is then used to write glowing praise about it.

It’s reminiscent of the bad old days of the early internet, when investing forums were just getting started and were easily abused by unscrupulous rampers trying to push dodgy penny shares. Thankfully, these days, most investing communities tend to have trustworthy regulars who can spot a ramp a mile away, and things are a lot better. But blockchain ramping is reaching new victims via new routes.

Countries too?

In a scary move, the Republic of the Marshall Islands is apparently considering adopting a digital currency as legal tender. That seems especially dangerous as the country has only one domestic commercial bank, and its only current legal tender is the US dollar. The IMF has, unsurprisingly, cautioned against the move.

Cryptocurrencies continue to fluctuate wildly in value, which actually makes them unsuitable for use as currencies. What a currency needs is stability, which is why the US dollar is so widely valued around the world while the Venezuelan Bolívar isn’t.

And it’s that total unpredictability of future valuation that makes them unsuitable as a long-term investment vehicle too. Consider it akin to a gambling chip at the poker table if you like, but I reckon you’d be mad to trust anything as important as, say, your pension or your children’s legacy to the cryptocurrency markets.

Horrible volatility

Even the most famous of them all, bitcoin itself, remains highly volatile. Reaching a peak above $19,000 in December 2017, the price has crashed as low as around $6,300 now. And looking at the recent short term, bitcoin fell by 16% in just four days at the beginning of September — and the currency markets go nuts when the pound moves by just a cent or two against the dollar.

There are already moves towards more stable electronic currencies, for example tied to and backed by traditional fiat currencies. But they won’t be much use for long-term investors.

And right now, if you’re thinking of taking advantage of fallen cryptocurrency valuations as an investment, I’d urge you to think again. After all, a share of a productive and profitable company will generate actual new wealth. Bitcoin never will.

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Alan Oscroft has no position in any cryptocurrencies, and neither does The Motley Fool UK. Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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