I am not an expert in bitcoin but I am deeply concerned about the relatively steep rise and fall in bitcoin’s prices.
As part of my community services, I look after a lot of elderly persons.
When many of them are queuing up in front of bitcoin machines to buy bitcoin without knowing what they are buying, I fear for them.
It is also another sign that dark clouds are looming in the horizon.
The following are my key concerns about bitcoin:
1. Is Bitcoin’s price a true reflection of its value and utility?
Bitcoin’s price can fluctuate by 20-30 per cent in a single day.
It is therefore hard to determine its value and use it as a storage of value.
In addition, as a currency, bitcoin is a comparatively poor medium of exchange and unit for accounting and financial purposes.
The volatility of bitcoin’s market and fluctuation of its price make bitcoin difficult to use in transacting products and services.
As it stands, there is a lack of widespread utility for bitcoin.
Few businesses trade in bitcoin. And hardly anybody price anything in bitcoin.
The generally small marketplace and lack of commercial activities for bitcoin may not be able to support bitcoin’s price, use and growth.
2. Are there strong fundamentals to support growth of bitcoin’s value?
Bitcoin’s prices have not risen in tandem with its functional benefits (if there are any benefit at all) and in line with major economic indicators and other market forces.
Prices have risen comparatively higher than most asset-backed and blue-chip instruments of investment.
Proponents argued that bitcoin can be used to replace fiat currency.
This argument does not make sense because fiat currency is backed by legal tender of a country and it can be used for many purposes, including paying tax.
Furthermore, fiat currency is protected from value debasement by authorities such as central banks.
This is to ensure price stability and prevent socioeconomic upheavals.
If fiat currency loses its credibility due to, for example, a political crisis or a poorly managed monetary system, the fiat currency can be traded for real assets.
It can also be swapped for more stable foreign fiat currencies.
Fiat currency has therefore a higher intrinsic value than bitcoin.
On the other hand, bitcoin has little, if any, intrinsic value at all.
Experts, such as Warren Buffet and economics professor Nouriel Roubini, have commented publicly that bitcoin has no intrinsic value.
Proponents of bitcoin have also propounded that there is a limited supply of 21 million units of bitcoin.
Therefore, it cannot be debased and its values should increase with demand.
This argument is not only baseless and wrong, it may also be fraudulent.
Bitcoin has forked into Bitcoin Cash, Bitcoin Gold, and Litecoin.
There is no guarantee that there won’t be similar changes in the future.
Besides, there is an increasing number of other cryptocurrencies and initial coin offerings (ICO) that can serve similar functions as bitcoin.
The current and future supplies of cryptocurrencies and ICO may create an oversupply and potentially debased bitcoin.
Can the market support an increasing number of cryptocurrencies?
Can all cryptocurrencies survive and justify their ongoing existence?
The argument that there is a limited supply of bitcoin and therefore its price should increase is illogical and ludicrous.
There is no guarantee that with a limited supply of bitcoin, there will always be a demand and for that matter, a growing demand for bitcoin.
To make matters worse, owners of bitcoin may sell some or all of their stock to take out profits.
This may cause the price of bitcoin to drop until the demand picks up – which may or may not happen.
If the buying volume drops or drops significantly, it may affect potential buyers’ sentiment and put downward pressures on bitcoin’s prices.
Even if there is a limited supply of 21 million units of bitcoin – if this number is true – it may not necessarily be an advantage.
First, with such a small number of units, it does not qualify to be a viable fiat currency.
More importantly, if the supply of bitcoin is not in alignment with potential nominal GDP, prices will undergo deflation.
In other words, the price index of all goods and services will decrease continuously.
By the same token, any nominal debt contract that is denominated in bitcoin would increase in value over time.
The convergence of such financial forces, according to Irving Fisher, was one of the causes for the Great Depression.
3. Is the Bitcoin as promising as it is made out to be?
The promises and possibilities about importance and values of bitcoin hinge mainly on opportunities arising from use of blockchain technology.
However, these opportunities may not necessarily involve use of bitcoin, let alone support its value and growth.
There are also other technologies that are playing an important part and if not, a more important part in influencing the future.
These technologies include quantum computing, artificial intelligence, big data analytics, Internet of Things, and automation.
Many companies and applications have been using such technologies to shape the banking and financial landscapes and generate real profits and growth.
Bitcoin has not been able to create a similar impact and may not necessarily make a stronger impact in the future to justify its potential rise in values.
Bitcoin has many downsides, including a lack of basic universal and common protocols to support better availability and accessibility.
With no credible authority and system of governance to manage and control bitcoin, usages of bitcoin can only operate in an untested market and may only continue to exist in an idealist’s paradise.
4. Why the steep increase in Bitcoin’s prices?
Are buyers of bitcoin making an investment decision based on any logical and reasonable basis?
Do they know what they are doing?
Many of them have no clue as to what blockchain technology, cryptocurrency, bitcoin, and other related technologies are all about.
They cannot explain the reasons behind the growing number of bitcoin buyers nor the increase in bitcoin prices.
Mostly, they buy bitcoin NOT because they have any use for it.
They buy bitcoin with the belief that prices will continue to increase and they can sell it in the future for a profit.
They are jumping into the bandwagon for fear of missing out.
Meanwhile, those who have bought bitcoin are preying on potential buyers’ fear and greed.
There are also dark forces playing up the prices and preying on greedy and ignorant buyers of bitcoin.
Many bitcoin miners and owners are fanning increase in demand for bitcoin and increase in bitcoin’s prices for their own interests and benefits.
Fear and greed as we know are the twin terrors of financial collapse.
These two and many other factors that are mainly contributing to the buying of bitcoin are similar precursors to past financial bubbles.
These financial bubbles include the Tulip and Bulb craze in the 1630s, the Dotcom Crash in 2000-2002, and the Housing Bubble and Credit Crisis in 2007-2009.
Are we seeing another bubble forming? Will it cause much pain and misery if the bubble burst?
There is a word to describe some of the senseless buying of bitcoin and its euphoria in the market – gambling.
As we all know, gamblers who do not stop will eventually lose all their money and perhaps, even their pants.
5. Are there inherent dangers and problems with Bitcoin?
There is currently a lack of governance and proper control of bitcoin.
Bitcoin has been known to facilitate illegal activities, including illegal vices, tax evasion, avoidance of capital controls, and money laundering.
Hence, there is a growing number of countries, including members of G20 that are working together to regulate cryptocurrencies such as bitcoin.
They are increasingly eliminating anonymity in the use of cryptocurrency by, for example, making it mandatory to report any income-generating or capital gain-generating activity and transaction.
As there is a growing mass of bitcoin buyers, who have no or little knowledge about bitcoin, the authorities are definitely going to watch bitcoin closely.
If anything untoward happens in the bitcoin market, there is little that the authorities can do, both locally and overseas to mitigate any fallout and respond to a potential financial crisis.
They may not be able to offer a safety net and legal recourse for affected victims.
The authorities can come down hard on bitcoin if social stability is being compromised and the financial market is being negatively threatened.
Do not believe for a moment that many of these and other forces will not be able to crash the bitcoin party and cause its prices to collapse and collapse steeply and quickly.
If you are investing in bitcoin, you may be playing a pyramid game or a game of musical chair.
When the music stops, can you handle the cascade of negative outcomes?
If you are investing without sound evidence, please invest what you can afford to lose.
Don’t overstretch yourself.
Please do not promote investment of bitcoin if you cannot justify its potential returns.
It may cause undue pain and sorrow to people who cannot afford to lose any of their hard-earned money.
Remember the Latin term – caveat emptor.
It means “Let the buyer beware”.
I hope this message will find a place in your heart.
By the way, I have also recorded other reflections.
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