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Color of Money: Bitcoin investing is sexy. But is the risk worth the thrill?

Michelle Singletary on

Q: Some have compared bitcoin to a Ponzi scheme in which money from new investors is used to pay off earlier investors. How is investing in bitcoin like a Ponzi scheme?

Ely: I argue that bitcoin and other cryptocurrencies, except possibly some ICOs, are akin to Ponzi schemes because those who create the cryptocurrencies (bitcoin miners, Ripple, etc.) will have profited greatly, at the expense of those who are holding cryptocurrencies when these schemes collapse.

Based on the market value of all cryptocurrencies, the wealth transfer from cryptocurrency losers to winners will be enormous when the bubble finally bursts, far exceeding what folks who invested with Bernie Madoff lost.

Given the amount of turnover (short-term buying and selling) in cryptocurrencies, I suspect already realized losses are many billions of dollars. Losses will be especially painful for those folks who have borrowed on their credit cards or against the equity in their homes to gamble on cryptocurrency price appreciation.

Q: What do you tell folks who fear they will miss out on what could be a big win? In every bubble there are winners, right?

Ely: In hindsight, those who invested early in bitcoin and other cryptocurrencies, and already have cashed out, are the winners. While some who jump into the cryptocurrency game today may get lucky and actually make a profit, if they then sell at the right time, most will lose -- the cryptocurrency train has left the station.

Q: What lessons can investors learn from the recent drop in bitcoin?

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Ely: The recent drop in the price of most cryptocurrencies, and not just bitcoin, illustrates how volatile the price of all cryptocurrencies is and the reality that this price volatility has no rational basis. That is the case because there is no there there with cryptocurrencies. They have no intrinsic value, nor do they generate any income for cash flow for those who "invest" in them.

I'm with Ely. Because for me -- not to get all biblical on you -- there's a Proverbs verse that warns that wealth gained hastily will dwindle. Rather than chase quick riches, aim to increase your wealth -- little by little -- with prudent investing strategies. Slow and steady isn't as sexy as investing in bitcoin, but it's also not as risky.

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Readers can write to Michelle Singletary c/o The Washington Post, 1301 K St., N.W., Washington, D.C. 20071. Her email address is michelle.singletary@washpost.com. Follow her on Twitter (@SingletaryM) or Facebook (www.facebook.com/MichelleSingletary). Comments and questions are welcome, but due to the volume of mail, personal responses may not be possible. Please also note comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.

(c) 2017, Washington Post Writers Group

 

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