Bitcoin is a digital currency system, sometimes referred to as electronic money or cryptocurrency. It is a virtual system on the Internet that is not controlled by a single entity, such as a central bank, and does not meet the generally recognized definition of a currency.
Bitcoins are created by a process known as mining, in which users who offer their computing power can verify and record payments into a public ledger. In exchange, they receive transaction fees and newly minted Bitcoins. These can also be obtained in exchange for products, services, or other currencies
Recently, Bitcoin has achieved a degree of notoriety following claims that, because of the anonymity it provides, it was being used to cover illegal activities such as drug trafficking and money laundering. In October 2013, the FBI shut down the Silk Road online market and seized 144,000 Bitcoins worth US $28.5 million at the time.
Nevertheless, Bitcoin has seen substantial growth. Merchants prefer to accept the currency because transaction fees are lower than those imposed by credit-card processors. The European Banking Authority warns that Bitcoin lacks consumer protections because Bitcoins can be stolen, and charge backs are impossible. Commercial use of Bitcoin is currently small compared to its use by speculators, and this has fueled price volatility.
Bryan S. Hall wrote in Techpinions last month about the fact that it’s possible to buy Bitcoins today and exchange them for your next mortgage payment. This exposes you to losing all its value due to crime, fraud, or incompetence – with no questions asked. However, he points out that you are still legally barred from even participating in crowd-funded investments of fully vetted Bitcoin start-ups, and he argues that it is clear that something is wrong.
Marc Andreessen, from A16Z venture capital group, is such a supporter of the financial power of Bitcoin that he is significantly increasing his firm’s $50 million investment in the system. He even hints that he may invest hundreds of millions over the next few years, claiming that Bitcoin will lose its shady image in the future, and businesses will become more comfortable with the idea of digital currencies.
Not everyone agrees with him.
One of the most vociferous opponents of this rush to Bitcoins is Bradley Reifler, founder and CEO of Forefront Capital, a private wealth management financial services firm in New York City.
His group provides investment advisory, asset management, and investment banking to high net worth clients. “As a financial advisor, it’s important to tell clients NOT to invest in risky businesses, such as Bitcoin,” he says.
Reifler’s feet are firmly on the ground when it comes to investment decisions. He has 30 years of experience in the management of hedge funds, as well as working in capital management, mergers and acquisitions, and with investment portfolios.
Bradley Reifler believes that using Bitcoin in these areas is not only irrelevant, but that it’s positively dangerous. Under present legislation, non-accredited persons are forbidden from legally investing in any start-ups, no matter how much hype surrounds them. They cannot even participate in a equity “crowd-funding” service. One route open to them is to buy a Bitcoin with all its attendant risks and hope for the best.
Bryan S. Hall is willing to take that risk. He wrote: “I believe the short history of the Internet reveals empowering individuals ultimately creates more new net value. Disruption works. There is nothing more disruptive than access to money — and the more you have, the greater the access. Being able to invest in start-ups from the start can do just that.”
Then, in apparent contradiction to that statement, adds: ” Even though I think Bitcoin itself is toxic.”
Hall may be a little confused, but Bradley Reifler certainly isn’t. His decades in investment banking taught him that there’s no such thing as a free lunch. If something looks too good to be true, then it probably is. This is the philosophy he follows in his current company, Forefront Capital. Investment is a serious business to be handled by professionals – taking chances is simply gambling; better to go to Las Vegas.
Bitcoin is not the solution – it’s the problem.