Bitcoin has recently come under fire from JPMorgan CEO Jamie Dimon, who critiqued the cryptocurrency as “worse than tulip bulbs.” He further emphasized his disdain stating that “it won’t end well. Someone is going to get killed.” Dimon’s remarks sent its value down 6% on Wednesday.

The One Big Reason Bitcoin Is a Terrible Investment More

Source: Shutterstock

Now, you might be wondering what’s the root cause of the hesitation with this and other cryptocurrencies.

Although it has been around since 2009, a little over a year ago, most investors had never even heard of Bitcoin … a 100% digital alternative to government-issued money. What a difference a year makes. Not only is Bitcoin a household word (even if not utilized by every household), there’s even an exchange-traded fund linked to the value of the so-called cryptocurrency itself, appropriately called the Bitcoin Investment Trust (OTCMKTS:GBTC).

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

In many regards the establishment of a cryptocurrency ETF lends credibility to the very premise of Bitcoin (as if the digital currency’s 600% appreciation in value wasn’t a compelling enough reason by itself). But before you plow any of your cash into Bitcoin, Ethereum or any of the other newly minted digital currencies though, there’s something you may want to mull.

What’s Cryptocurrency?

The short version of a long story: Bitcoin, like most cryptocurrencies, is digital currencies that can be used to electronically buy and sell goods and services. The attraction to it is that it’s fast, free and anonymous … if anonymity is a factor.

It’s also not regulated, by design.

Unlike money — dollars, yen, deutsche marks or whatever — the amount of actual Bitcoins out there that will ever be in existence is capped at 21 million. The limit is imposed by the underlying formula that determines whether a particular Bitcoin is valid. To-date, a little over 16 million of those Bitcoins have been “mined” by the computer-based process that has to look for the digital strings of data that qualify as a legitimate Bitcoin; they can’t be digitally faked.

In that regard the very notion seems brilliant. Potentially unlimited demand but a finite supply means the value of Bitcoin may have no cap. Indeed, it’s already being used to transact business for key players, including Microsoft Corporation (NASDAQ:MSFT) and Overstock.com, Inc. (NASDAQ:OSTK), so usability isn’t an issue either.

Nevertheless, there’s one fatal flaw with Bitcoin and its peers.

Why It’s a Doomed Idea

For some observers it’s arguably the way it’s “supposed to be,” and the way it was before 1971 when the value of the U.S. dollar was backed by (and represented) physical gold. In the same sense there’s only a limited amount of gold on the planet, there’s a limited number of Bitcoins that will ever exist — its value is real, set by market-based rates, rather than arbitrary and ultimately manipulated by a government body seeking to tweak its economy.

Here’s the problem … while the number of Bitcoins that will ever be in circulation is capped, there’s absolutely nothing to prevent the creation of another cryptocurrency to bleed off at least some of that price-inflating demand for Bitcoin.

The aforementioned Ethereum is one of those alternatives, though hardly the only one. Ripple, Litecoin, Dash, Monero, Bytecoin, Golem and Tether are just some of the several dozen cryptocurrencies that have come into existence not just after Bitcoin, but because of Bitcoin — their creators are looking to cash in.







They can come into existence because the only barrier to entry is a few hours’ worth of coding that most semi-skilled computer programmers could put together, and for any reason. And as evidence that the idea of cryptocurrency has already jumped the shark, Russia’s Burger King’s have sponsored and supported the Whoppercoin for no clear reason other than just because it can.