You’ve probably got a friend, relative or co-worker who’s been talking about “Bitcoin” or “Dogecoin” for the past few months. And you’re probably wondering either what those words mean or why they’re such a big deal.
Your friend or relative might have also encouraged you to invest in Bitcoin or Dogecoin. So, what exactly are these things, and is it a good idea to invest in them?
Both answers are somewhat complicated but the best advice might be “proceed with caution.”
“Bitcoins and other cryptocurrencies, like Ether and Dogecoin, are digital currencies and Bitcoin is the most popular cryptocurrency,” says Neil Grayson. Grayson is head of the financial institutions corporate and regulatory practice group for Nelson Mullins Riley & Scarborough, South Carolina’s largest law firm. One of his areas of practice is digital currencies.
“They are potential replacements for the U.S. dollar and other fiat currencies, or, a government-issued currency that is not backed by a physical commodity, as well as for gold,” Grayson continues.
It sounds promising until Grayson goes a little further.
“The fascinating thing about cryptocurrencies is that, unless they succeed in becoming currencies, trusted mediums of exchange, they will have no value,” he says. “I mean NONE.”
And as for Dogecoin, Grayson doesn’t mince words.
“There is merit behind bitcoin, but I think Dogecoin is a big joke,” he says. “In fact it was created as a joke and as best as I can tell the reason for its incredible rise in valuation is solely due to social media hype. And the end result will be no different than that of a traditional Ponzi scheme. The early investors will make a fortune — should they get out in time — and the later investors will collectively lose that same fortune.”
“If Dogecoin were a company,” he adds, “and the individuals who are promoting Dogecoin on social media were insiders of the company, this would be a classic pump-and-dump scheme and they would face significant civil and criminal liabilities.”
That might sound like a black-and-white piece of advice to avoid investing in cryptocurrency entirely but Grayson says that there’s some significant grey area, despite the naysayers.
“As I am sure you have heard, Warren Buffett once said that cryptocurrencies are probably rat poison squared,” he says, “and Jamie Dimon of JP Morgan Chase has said that cryptocurrencies are ‘a fraud, worse than tulip bulbs.’ Obviously, not everyone agrees with these opinions, as the market value for all cryptocurrencies was somewhere around $2.5 trillion.”
Grayson says the true litmus test for whether or not Bitcoin or Dogecoin will be profitable in the long term is yet to come.
“The challenge is in figuring what it will take for Bitcoin or any other cryptocurrency to become an accepted medium of exchange,” he says. “The U.S. dollar, which is legal tender for all debts, public and private, is no longer backed by gold but is backed by the power of the U.S. government. It is an accepted currency because everyone agrees to take U.S. dollars, because they believe that everyone else will take U.S. dollars; it’s a self-fulfilling equilibrium. It is an open question whether Bitcoin or any other cryptocurrency reaches this same level of trust and acceptance.”
Ultimately, though, Grayson seems pessimistic about the future of cryptocurrency.
“At this time, I strongly believe that cryptocurrencies, overall, are in a bubble,” he says. “Neither Bitcoin nor any other cryptocurrency is anywhere close to having a stable valuation yet, so they are all still very speculative investments. Their current valuations are driven more by emotion rather than rational analysis.”