Taking a bite of Bitcoin

I’ve been researching about Bitcoin for quite a few months now. It began with a simple question by my boss while we were on a business trip in Bangkok in June 2017. He asked “Do you own a Bitcoin or other cryptocurrencies?”. I said no, I don’t own any. It was supposedly a conversation starter and I felt bad for not responding to him in the affirmative. Usually on business trips, we talk a lot about so many finance topics inside and outside work. He’s an ex-investment banker from Wall Street while I am just a lowly ex-auditor from a third world country. Not a perfect match but the combination of our east-meets-west talents is obviously a good one and working so well.

At that time, the price was around $2,500. Unknown to him, I’ve been researching about Bitcoin from the time I heard the name “Satoshi Nakamoto” back in 2015. I liked mystery and legal thriller novels during my school days so trying to identify the mysterious creator of Bitcoin appealed to me (I just don’t have the luxury of time to research deeply on it though).

Fast-forward to December 2017 just before the Christmas break. I asked him again “So, Bitcoin reached the $19,000 level. Have you sold your Bitcoin already?”. He said yes he sold it months ago. Thus, he missed the peak of the valley in December. Note that Bitcoin started selling only at $0.30 back in 2011.

Bitcoin is a virtual currency that uses cryptographic encryption system for transfers and payments. It is being managed and guaranteed not by any central bank but is basically being produced on a process called “mining” using high-powered computers on a distributed network. I won’t be elaborating more about Bitcoin as there are thousands of available literatures over the internet. I believe what people wants to know is whether this is something they can rely on for investment, replacement for the current currencies and how the world will adopt it.

Here’s a useful Youtube video just in case you want to know more but hate to read stuff:

 

Perceived value and usage

Value is relative. We can put any value on things around us. The stapler beside my notebook may be worth only $1 for you but since it has sentimental value to me, I am not willing to sell it for only $1. I want to sell it for a higher price. It’s the old school way of doing business as we learned from our ancestors’ barter concept. Basically, Bitcoin is just like that. It’s value or price is based on transactional and reservation demand. In simple terms, as long as there are people who believe that it has value and place transactions on it, then it is perceived to be valuable. We’ve seen a drastic uptick in Bitcoin’s price over the last quarter of 2017 and that’s because more and more people are investing in it. Whether it is artificial or a “pump and dump” game or not, I don’t know. If you ask me if it’s an investment bubble, my answer is “Yes”. In fact, there are other Bitcoin traders who just can’t admit it’s a bubble because they are benefiting from it’s volatility at the moment. Remember the subprime mortgage crisis of 2007? Large banks perceived those subprime mortgages as assets until they openly admitted that it has no value anymore.

In contrast to my perception on Bitcoin being a bubble, I believe in its almost uncrackable mathematical formula and algorithm as well at its distributed approach of management to Bitcoin miners. Satoshi Nakamoto, whoever he is (or they are), is/are a one hell of a genius. The blockchain system I believe is a game-changer in the way we do transactions. It’s something that banks, financial institutions and stock exchanges can adopt later on (If they do so, then it defeats the libertarian feature of Bitcoin).

Sustainability and Scalability

Bitcoin’s lifeblood is electricity. Without electricity, there will be stoppage and blockage. In a distributed network, it may not pose a huge danger as the data and files consisting a block on a blockchain are backed-up in a distributed manner. But how about the cost of electricity? It’s a rising cost of doing business that is not being captured in Bitcoin’s P&L (if there is one!) that should also somehow affect its valuation and pricing.

Sometimes, I think that perhaps Tony Stark is Satoshi Nakamoto. Because to make Bitcoin scalable and sustainable in the next hundred years, we need thousands of Ironman-like nuclear reactors to be placed in all continents. Bitcoin believers say that this is the future of financial system. My question to them, how can it reach the poor communities who up to now don’t have electricity?

credit to Washington Post

Measurement, regulation and taxation

Peter Drucker said “you can’t manage what you can’t measure”.  Applying that statement to Bitcoin and other cryptocurrencies, the fair value measurement is a big question. How much more its management and related taxation? Currently, the US IRS made mandatory the taxation on Bitcoin no matter how much the value is. But then again, the question is always on the fair value measurement.

High volatility pushed governments to step-in, ban and even stop initial coin-offerings (ICO) of cryptocurrencies due to the massive impact to the financial stability of a country. It’s understandable and reasonable. I believe those bans are just temporary because it appears that Bitcoin and other cryptocurrencies are unstoppable. Admit it, we can’t stop it. All we can do is to embrace and manage it through careful regulation and ensuring consumers and the investing public’s protection as the ultimate concern. How can the people claim back their money in case of a crash when there’s no one guaranteeing it? (At least the Philippine peso has ‘Ang salaping ito ay bayarin ng Bangko Sentral…” unlike these cryptocurrencies).

There were cases in the past that the blockchain technology was used for underground and illegal activities like drugs, terrorism and human trafficking. Again, how can the government step-in to stop those activities from happening?

To invest or not to invest?

While I believe in Bitcoin or more specifically, the blockchain technology as a game-changer in doing business transactions such as payments and transfers, it doesn’t mean that I strongly support investing in it. Why? Because whether or not to invest in Bitcoin and other cryptocurrencies is not just a personal investment decision. It has social and economic repercussions.

As Gordon Gecko said “Greed, for the lack of better word, is good”. It’s good for those who lusts for money, power and fame. Those who want to essentially own the world. But how about those on the other side of the fence? The marginalized, people who work for a penny a day, those whose livelihood indirectly relies on the “experts” of financial jungles like Wall Street? I may be overreacting here and overcomplicating things as cryptos are not yet mainstream anyway and haven’t changed the financial system…yet!

As an investor or future investor, what’s more important to you? Having short-term personal gains at the expense of others? Or be more socially responsible and invest only on more tried and tested financial instruments? The decision is yours.

Is Bitcoin the currency of the future?

Yes. It is the currency of the future. However, it’s something that the markets and the people are not yet ready to adopt. There’s a thousand things that need to be done by every country around the world to make it a viable currency.

In my opinion, the recent steep decline of Bitcoin and other cryptocurrencies is an indication that it is not worth taking into mainstream financial markets yet. I may be wrong in my opinion quoting it as a bubble but it doesn’t matter to me. What matters to me is neither Bitcoin nor the current fiat currencies can make this world a better place to live in. To make this world a better is place is a long shot thought because we have to eliminate first one of the key areas of human nature – greed.