Is there someone who still have not heard about Bitcoin? Or is there someone whose heartbeat hasn’t skipped when they heard about the jump in prices of the Bitcoin?
I was reading an article about Mr Kristoffer Koch who invested around $27 in 2009 to buy 5000 bitcoins and in 2017 those bitcoins would be worth $86899725, that’s a return of around of more than 4,000,000 per cent in less than 8 years.
If you search back in history, you won’t find lot many investments which would have given such yields in such a short span of time. Courtesy his $27 investment, Mr Krishoffer now doesn’t need to work ever, and he says that he invested while he was writing a paper on the topic without putting too much thought into it.
So, how many of you are planning to invest? In this article, I want to talk about why I believe Bitcoin is interesting and it’s going to stay and, yet, I would stay away from investing in it.
What is Bitcoin: Bitcoin is a cryptocurrency invented in year 2008/2009 by a guy named Satoshi Nakamoto (no one has met him till date). The whole infrastructure of Bitcoin is based on the algorithm, miners, exchanges and the wallets.
So, in short – Bitcoin is just another currency system but it is not like any other system working currently. I will be talking in detail about cryptocurrency, the role each of these players plays and how to really understand cryptocurrency in the coming weeks.
Our current payment system is based on Fiat Currency, i.e. it is based on a system where we trust some central authority and because it says so, we accept that the value of money.
Now, while Fiat Currency is just 100 years old, the world is changing rapidly and somehow our Fiat Currency is not able to keep pace with the current requirements and Bitcoin is able to exploit these shortcomings.
For example, over the years, more and more transactions have started happening digital and because these deals are happening virtually, we need a 3rd party to authenticate it. However, with more and more transactions happening over the internet, the banks become the main authority to authenticate these transactions through maintaining a track or ledger.
Moreover, every time you transact, you are passing your information to the bank which it can use to formulate a complete map of your financial health and a lot of people don’t want the bank to have all their financial information.
Secondly, Fiat Currency gave enormous power to the governments to print the money at their will which leads to another problem of hyperinflation.
In fact, in the short of history of 100 years, there have been 55 instances of hyperinflation. The most recent example is in 2008 when it was losing half its value in 25 hours. One of the worst was the hyperinflation in Zimbabwe where the value of currency went below a toilet paper itself.
Nationalistic in nature: If you are travelling from one country to another, you need to purchase the currency of the country you are visiting. According to 2015 figures, 6 trillion dollars of ForEx transactions happens every year. If we put a fees of half a percent over 15 per cent (varies based on banks and corporations), then a lot of money just goes only for transacting your money. Moreover, because of transaction charges, it gets very cumbersome to transact small amount of money.
So, if you see there are three main issues with the current set of payment systems:
Nationalistic in nature while the society is becoming globalised.
Loss of identity in every transaction.
Moreover, if you look closely you will understand that all three are serious issues and we do require some better currency and ‘Bitcoin’ came at the right time to solve all these issues.
Bitcoin is a global currency, thus, you can transact from any country to another country without any currency conversion. It is limited in number, therefore, while its price will increase, there won’t ever be hyperinflation as no one can print it infinitely.
Lastly, Satoshi has built a powerful infrastructure at the backend and an incentive mechanism for the miners, due to which, we don’t need any 3rd party to keep a record of our transactions.
Isn’t Bitcoin just great? If I am so much optimistic about Bitcoin, then why I won’t invest?
Examining Bitcoin for Ponzi scheme signs. (Others)
Too much optimistic: Whenever I invest in a company’s stock, I always ask myself ‘how much price is due to optimistic nature of people’. While people have already compared it to next big development after the Internet, I believe they have valued it way too higher. I say so because the inherent benefits of Bitcoin are also the biggest concerns, which stops it from becoming a mainstream currency.
For example: If no one has the information of the transactions i.e. where the money is moving then it creates a lot of issues. For example, A big usage of Bitcoin currently happens on the Deep Web where people do want to hide their credentials.
Moreover, governments do like to have some control over the finances of the people to stop them from doing something illegal i.e. funding child pornography or terrorism.
Multiple cryptocurrencies: While there are still a lot of questions to be answered, one of the big questions is whether we will all work on a single cryptocurrency or multiple cryptocurrencies and if we decide to work with single cryptocurrency, then which one to choose and who is going to decide that currency. Will it be some Central Government? And if we leave it to the public, then every time a price of a cryptocurrency goes beyond the roof, we will jump to the other one with less value and which will eventually again pop up the problem of conversion of cryptocurrencies.
4,000,000 per cent : People are still saying that Bitcoin can go higher because of its limited number. There is only 21 million bitcoin that can be mined, however, it is more becoming more like Ponzi schemes.
In a similar fashion to a Ponzi Scheme, the people who invested in the initial days would surely benefit as the value has risen through time. The people at the bottom (or who will enter last) will get hurt the most as they will buy at a premium and the value will drop drastically when it comes to its real value.
Therefore, my suggestion would be it’s good to be informed about Bitcoin and cryptocurrency as they are making the noise for the right reason, however, it’s also important to understand the true value of any product and not to invest just because everyone else is talking about it or investing into it.
(Disclaimer: The opinions expressed above are the personal views of the author and do not reflect the views of ZMCL).