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.
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.
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.
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.