I was damn sure that I will not write on Bitcoins or any other cryptocurrency but something nudge me. My friend, who is a techie asked me about my interest in cryptocurrency? My instant reaction is captured in below WhatsApp screenshot. Check this post why “I feel” it’s not currency or an investment – just a bubble.

Bitcoin

Why I highlighted “I feel” – because I am not an expert in this field & not even expert in spotting bubbles. Do you remember Speak Asia ads – even Mutual Fund & Insurance advisor started suggesting that to their clients. I feel that “when something is too good to be true – avoid” or if you don’t understand avoid.

What are bitcoins? 

[Theoritically] Bitcoin is cryptocurrency or digital currency. It is a system for payments for electronic transactions. In simple terms, just like you pay your electricity bill or insurance premium using your net banking account where there is no physical transfer of the money, bitcoins can be used to pay online retailers for goods and services.

Bitcoins can be earned using a process called mining.  There is no regulatory authority managing this cryptocurrency. Mining is a process where processing power of your computer is used to verify transactions. This results in a consistent, accurate and complete record of bitcoins in circulation and who owns how much. People who participate in mining get paid in the form of bitcoins when their work is successful. Bitcoins can also be bought with other currencies and earned by selling products and services.

Herd Mentality – If 10 Cr people say something Foolish, it is still Foolish

What is the value (read price) of a bitcoin?

Just like any other currency, bitcoins value fluctuates. As of November 17,

1 Bitcoin = US$ 7,926.02

1 Bitcoin = €6,723.51

1 Bitcoin = Rs. 5,16,934.70

Why do I feel it’s not currency?

The value of bitcoins has risen more than 500 times in the last 5 years. But the rise has been more due to speculation. It has caught the fancy of people worldwide as something hi-tech and they just buy and sell it just like they trade in stocks. In earlier years, the value of bitcoin currency has zoomed up and crashed dramatically.

Currency is something that is accepted widely, liquid, easy to get. It has to be relatively stable. For example, even if a retailer accepts online payments, he can easily convert it to cash. Can you imagine a shopkeeper accepting bitcoins & price goes down by 25-30%. (every quarter in last 4-5 years – bitcoin price went down by 20-50%)

On the other hand, bitcoin currency cannot be converted to a physical entity. It is not accepted worldwide. It is also used in dubious transactions online. Many countries have outlawed it.

There have been instances of hacking in the bitcoin network leading to drastic fall in value or loss of control over one’s bitcoins.

Why is Bitcoin Not an Investment?

Investment experts like Warren Buffet have warned against getting into the Bitcoin bubble in 2014. He had a harsh stance on it. <(Bitcoin) Stay away from it. It’s a mirage basically,” and went on to say “The idea that it [Bitcoin] has some huge intrinsic value is just a joke in my view.>

I am a technical handicap so even I can’t see any value. If it’s just about price appreciation – it’s speculation, not investment.

You may find your answer in Greater Fools Theory

Why is cryptocurrency a bubble?

Bitcoin currency is not widely accepted.

Earlier, such high returns were given by tech companies in 1990s and this led to the dot cum burst. Most of the use of bitcoins has been speculation.

It is highly volatile.

Here is a chart to show its volatility.

Bitcoin Bubble

Price rose from US$13 in January 2013 to US$1044 in November 2013 and then fell down. When Japan declared it as legal currency, it went up by around US$ 200 which is extreme.  The process by which bitcoins are earned consumes tremendous amount of energy which is expensive. It is akin to spending a lot of money to buy something which has no value as of now.

It is based on blockchain technology where records are linked to each other using cryptography. The technology is nascent and if someone manages to break it, he/she will control the entire bitcoin corpus. Unless it becomes a mass technology, usable by all, bitcoin currency cannot be adopted universally. If governments start controlling it, then they will use it for inappropriate uses like writing off debt (wild guess). There are many cryptocurrencies in the market and none of them are completely secure.

Problem with a bubble is it can be as small as a pearl or as big as a truck. Buffett called this a bubble in 2014 & its up 10 times after that. Today I am trying to call it (please don’t follow my advice – I can be absolutely wrong) – it can go up another 10-20 times. Read – Indian Real Estate Bubble

Bitcoins in India

In India, the number of users of bitcoin currency is increasing. The RBI has declared it will not allow cryptocurrencies in India. If you still want to invest in bitcoins, I am not the right guy for advice.

Do not get swayed by price appreciation – you will find many such examples in history from tulip mania to south sea bubble to LTCM to subprime.

If you like this post must share with your friends – let’s save few more financial lives. Please feel free to share your views on Bitcoins in the comment section.

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6 COMMENTS

  1. Bitcoin, and for that matter all the other crypto currencies, are a mirage. Normally, currency is a piece of paper that you hold in hand but whose value is guaranteed by the govt. Other assets such as gold are something which can be physically seen and traded. Digital transactions are extensions of all these but the underlying asset is still physical. In the case of bitcoin, everything is virtual and there is no physical asset supporting it. It’s simply based on hype. It might grow ten-fold from where it is now but eventually it will be worth zero. Like they say, you can fool some people all the time or all the people some of the time but not all the people all the time.

  2. how do I buy a cup of tea? a railway ticket? vegetable etc. I would never term is as currency as it is indivisible and unacceptable by masses. Read the story below which I heard and loved many times to understand fundamentals …. (I am not author)
    Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for $10 each.

    The villagers, seeing that there were many monkeys around, went out to the forest and started catching them. The man bought thousands at $10 and as supply started to diminish, the villagers stopped their effort.

    He further announced that he would now buy at $20. This renewed the efforts of the villagers and they started catching monkeys again.

    Soon the supply diminished even further and people started going back to their farms.

    The offer increased to $25 each and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!

    The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would now buy on behalf of him.

    In the absence of the man, the assistant told the villagers; “Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35 and when the man returns from the city, you can sell them to him for $50 each.”

    The villagers rounded up with all their savings and bought all the monkeys. Then they never saw the man nor his assistant, only monkeys everywhere!

  3. Hi Pankaj,

    I heard this story with respect to Share market. This story was circulated to warn people about investments in shares, as Indian Share market is mostly driven by FII funds (as per the analogy here man and assistant are FIIs). When they take out the money our markets fall as a pack of cards. Even today it is true. People should be careful while investing in Shares or MFs.

    Thanks,
    Harsha

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