Bitcoin — nonsense
This one has been grabbing a lot of the headlines lately. Friends have asked me whether they should join the craze. I think Prof Roubini put it well in a recent interview that “ the Flintstones had better monetary system than Bitcoin.” Below are a summary of the reasons why Bitcoin is a dodgy investment.
- Bitcoin as a payment system — nonsense
One of the arguments for the use of Bitcoin is its use as a payment system. It will allow parties to a transaction to side step banks, payment networks, credit card fees, merchant fees, forex fees and many others. Theoretically, this should allow an SME to be able to accept payments from anyone in the world easily without the current fees, thereby facilitating commerce.
Practically, this is not feasible. As it stands, a mom-and-pop store or a home-based small business would much rather accept the normal payment methods than accepting bitcoin. Accepting payments in bitcoin would require a lot more complex computing effort to verify the transaction, convert that currency to cash on an cryptocurrency exchange. Also, these efforts are not cost-free. In fact, the transaction costs can be a lot higher than existing payment systems.
It is also not a scalable payment system. The Visa payment rail can process 24,000 transactions per second, on average. Bitcoin can process 5 transactions per second, at maximum.
So, why would anyone want to go through all that hassle when a simple cash-on-delivery or the myriad digital wallets and payment systems already exists and is much simpler to use?
The only people who would want to use bitcoin as a payment system are criminals and terrorists who value the anonymity that comes with bitcoin as a payment system.
2. Bitcoin as decentralised monetary system
Another argument for Bitcoin is the decentralised nature of the technology. It relies on distributed ledger technology, where miners can independently verify transactions through complex computing cryptography. Proponents herald such a model as a revolutionary financial system that breaks the centralised control of central bankers who has been playing fast and loose with money; given their monetary policy levers of setting interest rates, purchasing government securities, yield curve control and printing money.
Putting aside the problematic nature of the argument against central banks’ centralised control of the world’s monetary system, the point that Bitcoin is a decentralised monetary system does not hold much water. The mining for 99% of bitcoin transactions is done by 5–6 oligopolic firms with opaque governance, based in countries without much rule of law such as Russia, Belarus and China. That sound a lot like central banks, only the central banks here are not accountable to anyone and in fact, hardly anyone knows who they are or how they operate. So much for decentralisation.
Furthermore, while central banks’ monetary policies over the decades have had detrimental side effects, such is the nature of policy-making. Their more extreme policies have come in the face of crisis, with the ultimate objective of stimulating the wider economy, reducing inflation and unemployment. Sure, they have make mistakes but surely the best way forward is not to implement a system outside of their control but put better safeguards and implement better policies. Something as crucial as a monetary system, which serve as the lifeblood of an economy, has to be centralised to a significant degree by its very nature and the central authority to oversee the system be subject to transparency and accountability.
3. Bitcoin as investment tool
Another argument for bitcoin is that it can be valuable in portfolio management. One argue for it to be a hedging tool. This does not hold true in the Mar 2020 sell-off, where Bitcoin’s value also took a nosedive along with the wider equity markets. One would be better off putting their money before that in Treasuries, the dollar, gold or even in Yen.
Bitcoin has no store of value, unlike gold and other precious metals. It does not has income.
The only possible use is its speculative nature. If you have 1% of your portfolio to spare for speculative temptations, sure by all means, indulge yourself in this folly. But let’s hope investors are smart enough to put no more than that in Bitcoin.
So why has Bitcoin been on such an inexorable upward trajectory? The climb has indeed been spectacular. It resembles much of the infamous tulip mania. A lot of investors buying in, in the fear of missing out, which drives it even higher to bubble territory. More cynically, there are suspicions of illegal trading activities like price manipulation, spoofing, wash trading and front running
All in all, Bitcoin spells trouble and I’d rather not be near it with a ten-foot pole.
Governments and regulators need to look at regulating it more closely to preserve market stability and protect investors from harm, intentioned or otherwise.
