UNLESS you have been living under a rock, you would have heard the buzz about cryptocurrency, and Bitcoin in particular. Debates are raging everywhere, and on a global scale – on television, print media and even WhatsApp chat groups. But the one fundamental question that always comes up is “Should we buy ah?”
So what is Bitcoin? Bitcoin, along with other cryptocurrencies (crypto) such as Ethereum, Ripple, NEM, Litecoin, Dash, Zcash and hundreds more, are basically a form of digital currency where encryption techniques are used to regulate the production and verification of transfers of such units.
Cryptos presently have a market capitalisation of US$100bil (RM419.36bil) and have grown at a mind-boggling rate of over 1,000% in the past 12 months. To put things in perspective, cryptos are now cumulatively worth slightly more than Bank Negara Malaysia’s foreign reserves of US$98bil (RM411bil). Crypto advocates are quick to point out that the staggering growth in price and trading volume vindicates their long-held belief that this is indeed a currency for the digital age. On the other hand, cynics (such as myself) once mistakenly equated the growing list of cryptos available for investment to the selection of a beverage to buy at the local 7-Eleven!
But on a more serious note – is Bitcoin a legitimate currency or an investment class asset? Or is it both? Is it the mother of all digital disruptors or just an epic bubble that is destined to burst – just like the famed tulip mania of the 1600s?
The beauty of cryptos is that they are not owned by any government or central bank, and as such is supposedly “safer” as it is free from government influence.
If a currency is defined as a “stored value”, then by definition Bitcoin fits the bill! But I would argue that for it to truly be a currency, it must also be easily convertible to everyday goods that people can consume, otherwise there would be no point to owning it! At present, only three online merchants accept Bitcoin payments, and a few countries have allowed Bitcoin ATMs.
I am more inclined to compare Bitcoin to gold, an investment asset that people have grown to appreciate over thousands of years to store value, and was the everyday currency in use prior to paper notes. The similarities are remarkable – gold is also scarce and requires a complicated mining process, can be transferred from one party to another and has an almost religious following.
However, Bitcoin has one overwhelming advantage over physical gold – the ease in which ownership can be transferred, and this ownership (though anonymous) is tracked by blockchain technology. One could argue that Bitcoin is the gold of the digital age and the world is experiencing the modern-day equivalent of a gold rush!
Warren Buffet was once quoted as saying that aliens looking down on earth would probably scratch their heads in disbelief when they see humanity’s obsession with gold. He described it as essentially a yellow sparkly metal that “has no utility”. We spend millions digging it up, turning it into bricks, then we bury it in some vault somewhere! We can’t eat gold, it doesn’t yield income – but at least we can wear it! Which leads me to conclude that perhaps Bitcoin, and its crypto cousins like Ethereum and so forth, are the digital jewellery of the 21st century!
I, for one, do not accept Bitcoin as legal currency. When a central bank like the United States’ Federal Reserve System prints money, I know that the issuer or counter-party is the richest and most powerful country in the world, backed by trillions in GDP per annum, and the value of the currency is based on economic fundamentals of the country. In Bitcoin’s case, it is issued by anonymous miners and its value is determined by who is willing to buy it next – hopefully at a higher price!
It is obvious that buyers of these digital currencies are typically involved in illicit activities and do not want their identity or source of funds revealed. The second group of buyers driving the crypto market are investors who have contracted a very common epidemic that spreads throughout the financial world from time to time, called FOLO (fear of losing out), or literally in Malaysia its “FOLO je lah“!
For me to consider Bitcoin as a valid currency, it would need to be issued and regulated by a politically agnostic financial institution such as the Bank of International Settlements (close enough!), and accepted as legal tender in all countries. Until that day, I prefer to continue living as an alien among humans!
Many have asked me where the price of Bitcoin will go. The honest answer is that I have no idea! It is impossible to predict as you never know how long this “epidemic” will last, or how long the “invisible hand” will continue supporting this market.
The recent dramatic movement of Bitcoin’s price from US$2,800 (RM11,740, pre-split/fork) to US$4,800 (RM20,125) then a drop to US$3,000 (RM12,580) in a matter of days, only to rebound to US$3,700 (RM15,510) in the same day underlines the madness of this market. My gut feeling is that this is similar to a “dead cat bounce” situation like how a cat would bounce up after it has just been run over by a car. If the crypto bulls can continue pushing it through its previous highs, then the rally will continue in the short-term. However, it is more likely that other countries will follow China’s lead in banning initial coin offerings (ICO) and Bitcoin trading on exchanges, or at the very least introduce some regulation which will restrict the air going into this already-inflated balloon. If the United States follows suit in introducing legislation or requiring the identities of token holders be known, a 50% fall in the price of Bitcoin and/or its crypto cousins is not hard to imagine.
Meanwhile, I recommend that my friends bitten by the currency bug to buy the US Dollar. Its recent weakness against major currencies presents a terrific buying opportunity for this the most recognised and globally accepted form of legal tender today.
Wan Hazreek Hussain Yusuf is the founder and managing director of the Dara Group of companies as well as an investor.
