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Mufasa

Cryptocurrencies: THE FUTURE IS HERE

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I've been doing a lot of research on cryptocurrencies over the last few days. The most popular of these currencies is obviously Bitcoin, which has been in the news much. Many feel that they are too late to the game- but there are a ton of currencies out there that are just beginning to surge, and actually provide much more promising models than Bitcoin (which happens simply to be the first and therefore has name-recognition, but is not necessarily the best). 

 

Now, I don't have much money to actually invest, but I also don't have many expenses, so I am thinking to invest a very [very] modest amount. Anyone investing in cryptocurrencies should tread carefully and acknowledge that we do not know the futures of these currencies. They could all crash. Or, we could have a situation as with Bitcoin, where people who invested hundreds could today be millionaires. Of course, it will probably be something more modest and nuanced. I would be happy to share insightful articles/forecasts if others are interested.

 

My major hold-back at this point, however, is the Islamic issue -- whether they are halal, haram, or something in between. I have seen mixed [though vague and maybe unqualified] opinions from scholars, none of which have really made me feel convinced either way. I just came across this article, which I have not yet read, but which I think Okays Bitcoins at least for certain usages.

 

This thread is just to open a general discussion about cryptocurrencies. My first question for Mo- or others who know about cryptocurrencies: What would be your major arguments for it being haram? Let's start there, and then I'll have some more pointed questions depending on your responses.

 

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one reason why there is a bubble (a bubble it is) on crypto currencies is that it is used very widely for criminal activities in the darkweb, thus driving the demand.

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8 minutes ago, Haku said:

one reason why there is a bubble (a bubble it is) on crypto currencies is that it is used very widely for criminal activities in the darkweb, thus driving the demand.

i mean that adds market value to bitcoin - so if anything it detracts from bitcoin being a bubble

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9 minutes ago, Haku said:

one reason why there is a bubble (a bubble it is) on crypto currencies is that it is used very widely for criminal activities in the darkweb, thus driving the demand.

 

If your point here is that it's an unethical industry, it's important to note that cryptocurrencies have also become an increasingly mainstream phenomenon. Using blockchain technologies, companies are doing really innovative stuff that could in the next few years become widely utilized by established financial institutions. You should look into Ripple, which is at the cutting edge of this (and which I want to invest in).

 

 

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Also how is that different than the internet and its use by the porn and other illicit activities? 

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We have to define the differences between the two primary sorts of speculation:

 

1. Speculative investing (halal),

2. Gambling (haram).

 

An example of speculative investment, for example, would be purchasing Exxon Mobil stock because you believe that they will outperform their peers and the market. This means that you inherently believe that the company is going to generate value for you over time and that is why you want to own its stock.


An example of gambling, would be purchasing Exxon Mobil stock because you think the price will go up. Not because you inherently believe the company will generate value in the future, but simply because you are of the belief that the price of the stock itself will go up as a result of market momentum or another market force unrelated to underlying value. Now you're probably asking "didn't both examples contain the same action?". Of course, but the intentions were different. 

 

How do you then apply this rule to Bitcoin? In the case of Bitcoin, or cryptocurrency in general, it isn't generating any value. Any movements it makes are driven by market momentum in one direction or another and are unrelated to any sort of underlying value. Why? Because Bitcoin isn't a value generating asset (like a house that can be rented, a company that produces goods or services, a cow that produces milk, etc.) in the traditional sense, in that you as an owner can't do anything with it that would generate value. The only way to generate value with cryptocurrencies is through the ones that operate a proof-of-stake model, but very few people would be able to acquire the amount of necessary cryptocurrency in a reputable PoS network.

 

tl;dr unless you have enough for PoS on a reputable network, crypto is effectively gambling. 

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I would like to add, blockchain itself and the concepts around it are generally very innovative and could lead to some major changes in the way we handle transactions by enhancing speed, security and allowing for a return to decentralization (similar to the free banking era of the past). The main issue with this of course is how it will affect government finances who are dependent on measures like quantitative easing/tightening where they can effectively print money or burn money. We've had central banks for the good part of the past century and they are essential for the existence of big governments. 

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Mo, thanks for your response. Admittedly, this is a new world to me. On two levels--the technical end and the investment end--I am still learning. I hope that we can both engage in this discussion in a way genuinely intended to reach a sincere conclusion, as I am actually intrigued and curious about this; as I said, I want to invest, but feel held back because of religious concerns. 

 

When you label the second investment option "gambling", is that actually a generally accepted definition of gambling? Why is that a form of gambling? It's not purely a game of "chance" as it actually involves understanding market forces and making educated investments, just as the speculative option. Is this a generally/widely accepted Islamic position on investments or are there differences of opinions here?

 

Secondly, I would advise against someone investing in cryptocurrencies merely because they think the price will shoot up in the near future. Instead, you should invest in cryptocurrency if you believe it will actually provide a service and hold value in the future. I do think, as you've noted, that blockchain will result in major changes, and the reason I like Ripple is because they seem to be at the forefront of that- networking with mainstream financial institutions. Utilizing cryptocurrencies implies that you understand their value, believe others will come to, and want to stay ahead of the market.

 

Lastly, Cryptocurrencies are not investments in the way stocks are. They're actually different currencies and you're just banking on those strengthening. People do actual exchanges with these currencies that go beyond merely passing around digital coins for the heck of it. Within Bitcoin, there are investment options, which I intend to stay away from. To me, holding your money in cryptocurrency is really just converting to a different currency, strategically forecasting that this currency will soon hold more value and be used in mainstream financial exchange. In this sense, it seems like it would be much more akin to transferring assets to a different currency thinking that that currency might soon pay off, no? Would that be haram?

 

I didn't read the entire article that I posted above yet, which is from a scholar at Dar al-Ifta, but I did see that he considers bitcoins to be "digital assets." What do you make of that? I'd be curious, if you do read it, what you make of his thoughts.

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3 hours ago, Mufasa said:

 

If your point here is that it's an unethical industry, it's important to note that cryptocurrencies have also become an increasingly mainstream phenomenon. Using blockchain technologies, companies are doing really innovative stuff that could in the next few years become widely utilized by established financial institutions. You should look into Ripple, which is at the cutting edge of this (and which I want to invest in).

 

 

I'm just stating that the reason behind the boom of crypto currency is due to the high value put on it by the criminals. And then it became a bubble.

CC is based on Block Chain, but these are two different things.

 

 

3 hours ago, Mufasa said:

Also how is that different than the internet and its use by the porn and other illicit activities? 

Internet is a great tool and it is used by porn industry and other illicit people. But internet won't lose its value if porn were to suddenly pull out. CC on the other-hand will find it self high and dry if darkweb pulled out. In fact, bit coin will deflate in the near future when the criminals move from bitcoin to more cryptic CC.

When a (now) practically worthless CC gains lot of value suddenly, an ethical person will need to think twice about what he is investing in(and therefore contributing to). Sorta like investing in a company which produces bullets and is growing suddenly because it found a new market in recently destabilized country.

 

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9 minutes ago, Haku said:

I'm just stating that the reason behind the boom of crypto currency is due to the high value put on it by the criminals. And then it became a bubble.

CC is based on Block Chain, but these are two different things.

 

 

Internet is a great tool and it is used by porn industry and other illicit people. But internet won't lose its value if porn were to suddenly pull out. CC on the other-hand will find it self high and dry if darkweb pulled out. In fact, bit coin will deflate in the near future when the criminals move from bitcoin to more cryptic CC.

When a (now) practically worthless CC gains lot of value suddenly, an ethical person will need to think twice about what he is investing in(and therefore contributing to). Sorta like investing in a company which produces bullets and is growing suddenly because it found a new market in recently destabilized country.

 

 

I'm not as confident as you that the bubble will burst from criminals pulling out, because so many new people have moved in. It's growing fast now and not from criminals, but from very ordinary people. It's also becoming accepted by more mainstream outlets.

However, the ethical point is a good one. I'm not sure it's akin to the bullet maker, because in that case, your investment is actually paying to build more bullets. But this is, at the least, helping criminals inflate holdings they might already have - nothing you're investing goes to them.

I'd have to read more about this and know to what extent these concerns are true though. I imagine, at this point, criminals are a very, very small sliver of those using a currency like Bitcoin or Ripple...

 

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34 minutes ago, Mufasa said:

Mo, thanks for your response. Admittedly, this is a new world to me. On two levels--the technical end and the investment end--I am still learning. I hope that we can both engage in this discussion in a way genuinely intended to reach a sincere conclusion, as I am actually intrigued and curious about this; as I said, I want to invest, but feel held back because of religious concerns. 

 

When you label the second investment option "gambling", is that actually a generally accepted definition of gambling? Why is that a form of gambling? It's not purely a game of "chance" as it actually involves understanding market forces and making educated investments, just as the speculative option. Is this a generally/widely accepted Islamic position on investments or are there differences of opinions here?

 

Secondly, I would advise against someone investing in cryptocurrencies merely because they think the price will shoot up in the near future. Instead, you should invest in cryptocurrency if you believe it will actually provide a service and hold value in the future. I do think, as you've noted, that blockchain will result in major changes, and the reason I like Ripple is because they seem to be at the forefront of that- networking with mainstream financial institutions. Utilizing cryptocurrencies implies that you understand their value, believe others will come to, and want to stay ahead of the market.

 

Lastly, Cryptocurrencies are not investments in the way stocks are. They're actually different currencies and you're just banking on those strengthening. People do actual exchanges with these currencies that go beyond merely passing around digital coins for the heck of it. Within Bitcoin, there are investment options, which I intend to stay away from. To me, holding your money in cryptocurrency is really just converting to a different currency, strategically forecasting that this currency will soon hold more value and be used in mainstream financial exchange. In this sense, it seems like it would be much more akin to transferring assets to a different currency thinking that that currency might soon pay off, no? Would that be haram?

 

I didn't read the entire article that I posted above yet, which is from a scholar at Dar al-Ifta, but I did see that he considers bitcoins to be "digital assets." What do you make of that? I'd be curious, if you do read it, what you make of his thoughts.

 

On the first question:

 

It is a generally accepted definition yes. It is based on chance because in essence, if you are speculating purely on price movements, then you're completely ignoring the underlying value of the asset itself. This is because of the reality of the random walk, whereby the future price of any given asset cannot be predicted. When it comes to investing in a company, the random walk in a stock price generally has a trend upwards or downwards based on its prospects as a company. By analyzing the prospects of a company you can assess the risks and based on your preferences and expectations of the performance of those prospects, you can speculate on the general motion of the trend of the random walk (e.g. with the Exxon example, say they won a new oil contract in Peru and Peru is assumed to have x amount of recoverable oil assets that Exxon will now be in charge of marketing to the world). 

 

If you're speculating purely on the random walk itself, and not the trend which is defined by underlying value, then it is the exact same as a Martingale. You might respond to this with "Well Bitcoin has a trend! That trend is up!", which in itself is a fallacy because it still conforms to the Martingale property of a random walk even if it appears to have a trend. Why do I say this? Because the underlying value of Bitcoin is in its value as a means of exchange, but because it is not a functioning means of exchange (proof of this is in the volatility of currency itself, for something to be a viable means of exchange it has to have stability relative to the prices of goods), it has as a result even lost its underlying value as a currency. 

 

On the second question:

 

Ripple is different because the value of the currency is driven by the Ripple Network. But buying XRP doesn't mean that you own part of the network or are creating value, because unless you're an institutional investor it'll be impossible for you to have a stake large enough to be considered in granting rewards for proof of stake when the consensus of any ledger is applied. If you want to invest in the future of the technology, then your best bet is to buy Ripple shares when the company itself goes public or invest in banks adopting the tech. The banks themselves aren't buying or transacting in XRP, but they're using the code and technology developed by the company to simplify transaction costs.

 

On the third question:

 

As far as I know, unless you offer currency exchange services then simply investing in currency is gambling too. It makes 0 sense to buy USD on the notion that you believe the USD will increase in value (same goes with most commodities that are simply stored, e.g. gold, oil, palladium, etc.). 


I haven't read the article but tomorrow I am going to have a long session with Sh. Abdullah al Judai where I will spend around 5 to 6 hours one to one breaking down financial concepts in their simplest terms and seeking answers on whether they are haram or halal. 

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mo - is insurance haram? Why? I am not talking about taking insurance out of a necessity such as car insurance to satisfy the law. More like ilfe insurance.

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16 hours ago, Haku said:

mo - is insurance haram? Why? I am not talking about taking insurance out of a necessity such as car insurance to satisfy the law. More like ilfe insurance.

I wouldn't think so. The insurance company assumes your risk - so you are buying a service from them. People don't get insurance hoping on the off chance their house gets flooded so they can win a payout - they buy insurance in order to secure their assets incase of a disaster

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First: Mo, did you get any response from Sh. Abdullah al Judai? I'm very curious. Please make sure he 'fully' understands cryptocurrencies first.

 

Second: How exactly do we define "gambling"? I think we all assume we know what it is, but I'm not sure I could really draw the line clearly.

 

Third: Haku, I have been looking into the ethical/criminal end. Interestingly, Silk Road (darkweb marketplace) no doubt helped Bitcoin "make it." When Silk Road closed down, many questioned whether it marked the end of bitcoin. Just the opposite though, it hardly put a dent. To my understanding, this suggests that Bitcoin has moved far beyond that world.

It also began with an ethical objective which, while I do not fully agree with, I do at least sympathize with. 

 

I started an interesting documentary on netflix called Banking on Bitcoin. I think it's worth checking out for those interested..

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Dark web is pretty strong and ongoing. Shutting down of one market place or two won't affect all the underground CC dealings. 

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