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Rent Bitcoin or Any Other Cryptocurrencies, But Don’t Buy ‘Em. Here’s Why.

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Ask 10 people what they think of cryptocurrencies like bitcoin or Ethereum, and you'll likely get 10 answers. Indeed, ask those same folks to define cryptocurrencies, and you'll likely still get as many different answers.

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And therein lies the fundamental flaw with bitcoin itself - enough people like it and participate in its creation, but the only explanation most anyone can offer as to why they're bullish on the popular cryptocurrency is that they think the bitcoin price will continue to rise because it's already rising.

That's a problem, too. Sooner or later, someone will challenge why the digital currency is worth whatever it's valued at in the future. If the best answer anyone can come up with is "it's all the rage," JPMorgan Chase & Co. (NYSE: JPM ) CEO Jamie Dimon - who called bitcoin a fraud - is likely to be well vindicated.

It's what happens in the meantime, though, that keeps all eyes glued on the bitcoin price chart.

Bitcoin Will Implode… Eventually

For the record, yours truly said here weeks ago there was a fatal flaw in the very premise of cryptocurrencies. That is, unlike government-issued currency, with no cap on the number of them than can be created, as existing digital currencies become more expensive, new ones will be created. Eventually, demand will be satisfied by an infinite number of cryptocurrencies of all ilks.

Dimon said it more abruptly :

"The only value of bitcoin is what the other guy'll pay for it. Honestly I think a lot of the buyers out there are out there jazzing it up every day so you'll buy it too, and take them out."

He's right.

Investors will buy shares of Facebook Inc (NASDAQ: FB ) because, as the dominant name in social networking, it can grow advertising revenue in the future, and pass some of that added wealth back to investors in the future. Investors buy Wal-Mart Stores Inc (NYSE: WMT ) because it's proven to be able to supply shoppers with goods they can't otherwise readily get - or at a price - any other way. People buy a house because it's not only ultimately cheaper than renting, but because it also meets a very real need of keeping a roof over their heads.

But what's going to inflate bitcoin price from here? Not the question of "will the bitcoin price chart rise?". Why will it rise? Be specific, as were investors who can explain their purchase of Facebook, or Wal-Mart or a home; simply saying demand will outstrip supply isn't actually an answer in itself.

There's not actually a credible answer to the question.

That's not prevented some well-thought answers from emerging, mind you. Take some of FundStrat Global Advisor co-founder Tom Lee's recent comments on the matter as an example:

"… all future great business are going to be digital. And with that concept, bitcoin represents a store of value because it's an encrypted - personal encrypted database, that for seven years hasn't been hacked. I mean, that is a way to store value. And if personal information is our gold, bitcoin is our digital gold."

Sounds smart, right? The flaw in the logic is, personal information isn't our gold in a literal or proverbial sense, and the encryption of something isn't its value. It's the thing itself that has value. The encryption of it is simply a storage or delivery vessel.

Lee then went on to say the following:

"… at the core, it is just a very well designed database. One that because of the way the encryption is built into it, is very hard to crack. So, unlike typical databases where the encryption key is held by central entity, bitcoin has this thing called miners and nodes. That each of the nodes keeps a copy of the database, and therefore you need 51% of the nodes to agree on a transaction to say it's valid, otherwise it'll say it's a spoof transaction. Which means that bigger the database grows, and the more miners there are, the harder it is to crack. So bitcoin is encryption, but the encryption strength grows as there's more miners. And today, it's estimated that it would cost about $31B to create one fake coin."

It's another helpful insight to be sure. It's still not an answer to the overarching question, however, which is why bitcoin is justifiably moving to Lee's target price of $25,000. How will it bring more value to owners five years from now?

Lee doesn't say.

Thing is, half-explanations like Lee's are the norm. They sound good, delivered by well-spoken experts. When it comes right down to it though, there's never a compelling argument made for why it's an asset that's been appreciating in value, and why it should continue to do so.

Eventually, holders - regardless of however they got them - will have to exchange their digital currencies for actual currencies. Once that starts happening en masse and we get a taste of how unwilling most of the world is to trade meaningful levels of their own real money for digital currency, it could all come unraveled in a hurry.

Buy Bitcoin, For Now

It's at this point one would expect me to beg you off of any bitcoin or Ethereum trade, fearing an impending disaster. I'm not going to though. Rather, I'm going to suggest if you intend to trade it, watch the bitcoin price chart closely. Like stocks charts, charts of digital currencies ebb and flow as opinions of them change, and their peaks and troughs are fairly predictable pivots.

Just don't make any mistake about what this really is, even if the cryptocurrency's backers have pieced together a very polished argument that this is the way of the future. It's not.

Much like the boom-then-bust Tulip mania in 17th century Holland fooled the experts then, the industry's top dogs have even managed to fool themselves now. The only value digital currencies really have is the one the masses choose to assign in. That can change in a heartbeat though.

Oh, and if you want to know how to buy bitcoin, it's not hard. Search the web for bitcoin exchanges or cryptocurrency exchanges, and you'll find plenty of options. Tread lightly though. Those exchanges are unregulated too… another reason to not expect the craze to last indefinitely.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter .

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The post Rent Bitcoin or Any Other Cryptocurrencies, But Don't Buy 'Em. Here's Why. appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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