Do you consider tulip onions to be a proper investment?
This is not a rhetorical question. Rather it is a question, which answer has to be informed by history:
The first historical record of an economic investment bubble popping leading to a crisis is the "tulip crisis" of the Netherlands. In its time, investors (called florists) bought tulip onions and speculated that the tulip would have a novel plant disease that would lead to funny patterns on the tulip's blossom.
Since the blossomed tulip would be much more valuable than the onion, this investment promised huge profit. Soon other people started to buy tulip onions. Soon the demand overwhelmed the offer. Soon the prices skyrocketed. Soon not tulip onions were traded but a derivative that promised tulip onions. The highest bid recorded was a house in one of the best locations in a major city for a derivative that promised three (!) tulip onions.
When time came to cash in, nobody actually wanted the tulips, because everyone only wanted the profits from investing into tulips. The value of the investment turned out to be zero. Most of the derivatives were fake anyway. All money was lost for everyone, who was still invested into tulips.
Back to the non-rhetorical question: What is the difference between cryptocurrencies and tulip onions as an investment?
You could basically replace most cryptocurrencies by mailing cash. That is irreversible and anonymous as well. You might not be able to prove that you mailed the cash. However people who need irreversible and anonymous money transfers typically can't go to court over the cash mailed. Likewise you can't take an anonymous party to court over not receiving a service after paying in BitCoin.
Cryptocurrencies may be more secure and more practical than mailing cash. However very few people actually use Bitcoin as a means to transfer money.
As a money transaction service for most people, PayPal is
- faster - within one minute instead of one hour (~10 minutes per block, 6 blocks for relative safety)
- safer - reversible in case of fraud, no losing access to your wallet (in case of handling your own wallet), no losing your wallet in a hack, no going bankrupt of an uninsured service provider (PayPal is a bank and thus subject to stability mechanism) due to a hack (hacks of service providers already happened). And all of this isn't even addressing that the initial paper already described an attack that would be counted as feasible in actual cryptography: To break BitCoin, you only need half of the computational power of the network for one hour, actual cryptography experts usually consider all of the computational power of all computers currently available until the heat death of the solar system as safe.
The attack already "happened" by accident leading to a split in the block chain from which a spin-off cryptocurrency was founded.
- cheaper - free for private persons, low percents for businesses instead of two digit dollar amounts for a single transaction to get sufficient priority.
This comparison may seem useless, because of existing use cases for cryptocurrencies. However the question is, if BitCoin (or a basket of cryptocurrencies) is a proper investment and not if there are any use cases. I'm refuting that any use case for Bitcoin addresses a problem for so many potential users, as to stabilize or even continually increase the value of Bitcoin, which could make it a proper investment.
I'm not affiliated to PayPal other than being a customer.
Last time I checked, ordering a pizza for BitCoins cost the equivalent of $60 for the pizza plus $12 for the transaction. Sure the pizza delivery service accepts $60 for a pizza. It might even accept $60 in tulip onions for a pizza.
No cryptocurrency enthusiast has ever been able to explain the difference between the cryptocurrency and tulip onions. Usually you get strange looks and some technobabble that the value can't sink, because of how some more technobabble will decrease future mining rewards. The problem is that a decrease in future mining rewards only marks the point in time at which mining does not pay off any more. If mining doesn't pay off, the network will die. People will try to cash in their "investment" and the bubble will pop.
You might say, that the "basket of cryptocurrencies" is a derivative. Don't fool yourself. If the bubble pops for BitCoin, it will for all other cryptocurrencies that don't offer a substantial benefit over established services like PayPal.
As a rule of thumb, any investment (not just cryptocurrencies) needs to pass the tulip onion test of "What's the difference?".