From selling at $0.30 in 2011, Bitcoin’s price soared to $19,000 just before the Christmas break last year. So people who invested in it years ago suddenly became millionaires. This makes the prospect of investing in it more enticing.
But what exactly is Bitcoin? Can we rely on it for investments and as a replacement for other currencies?
Bitcoin is a virtual currency that uses a cryptographic encryption system for transfers and payments. It is not being managed and guaranteed by any central bank, but is basically being produced on a process called “mining,” using high-powered computers on a distributed network.
Perceived value and usage
Value is relative. We can put any value on the things around us. For example, the stapler beside my notebook may be worth only $1 to you, but since it has sentimental value to me, I will not sell it for that amount.
Bitcoin’s value is based on transactional and reservation demand. As long as there are people who believe in Bitcon’s worth and use it for transactions, it will continue to be seen as valuable.
The exhaustion of marketing budgets of crypto companies, as well as scammers riding on its popularity, resulted in a huge demand in the last quarter. This caused Bitcoin’s price increase last month.
If you ask me if it’s an investment bubble, it is. Remember the subprime mortgage crisis of 2007? Large banks saw those subprime mortgages as assets until banks admitted that these no longer have value.
Despite seeing Bitcoin as a bubble, I believe in its almost uncrackable mathematical formula and algorithm, as well as its distributed approach to managing Bitcoin miners. The blockchain system is changing the way we transact. It’s something that banks, other financial institutions, and stock exchanges can adopt later on.
Sustainability and scalability
Bitcoin’s lifeblood is electricity. Without it, there will be stoppages and blockages. Bitcoin miners use a lot of electricity, the cost of which affects the virtual currency’s valuation and pricing.
Bitcoin believers say this is the future of the financial system. But I’d like to ask them: How can it reach the 1.2 billion people who don’t have electricity?
Measurement, regulation, and taxation
Management consultant and author Peter Drucker once said: “You can’t manage what you can’t measure.” In applying that to Bitcoin and other cryptocurrencies, the fair value measurement—and its regulation and related taxation—remains a big question.
High volatility pushed governments to step in, ban and even stop initial coin offerings (ICO) of cryptocurrencies, due to their massive impact on a country’s financial stability. Such moves are understandable and reasonable.
But I believe those bans are temporary, because crypto is unstoppable. All we can do is embrace and manage it through careful regulation and ensuring that consumers and the investing public are protected.
To invest or not to invest?
While I believe in Bitcoin—or more specifically, the blockchain technology behind it—as a game-changer in doing business, it doesn’t mean I support investing in it. Why? Because it is not just a personal investment decision; it has social and economic repercussions.
These include Ponzi schemes, cybercrimes, money-laundering, and terrorism. It may also negatively impact a country’s economic stability, because a shift from centralized to decentralized fiscal control might lead to wide swings in prices and rates. This would lead to defaults and unemployment.
Is Bitcoin the currency of the future?
Yes. We are now being introduced to the “internet of money” that will soon replace paper bills and minted coins. However, it’s something that markets and people are not yet ready to adopt. There are thousands of things that need to be done to make Bitcoin viable. In my opinion, the high volatility of Bitcoin and other cryptocurrencies indicates it’s not worth taking into mainstream financial markets yet.
Jay Olos is the group head of finance for CompareAsia Group and a member of the board of directors of MoneyMax.ph, the Philippines’ leading comparison website for insurance, credit cards and loans. Tweet @MoneyMaxPH, “Like” us on Facebook at MoneyMax.ph, and email your comments to email@example.com. For more information, visit www.MoneyMax.ph.