Bitcoin is the king of Cryptocurrencies.
At some point in your life you will be asking the Who, Where, What, Why and How questions on Bitcoin.
Before we go into that, let’s revisit the concept of money.
We spoke about money – that money has value because someone is willing to accept it as a payment to goods and services. It has value because you believe in it. Therefore it is not difficult to understand why Cryptocurrencies have value, and why Bitcoin has taken everyone by storm.
In fact, you may have heard that Tesla and PayPal are among some of the companies who will allow consumers to pay using Cryptocurrencies.
You also have heard the Monetary Authority of Singapore has issued payment services licenses to several digital payment tokens services providers, including DBS Bank. What this means is in the near future you can start paying for goods and services using Cryptocurrencies.
But why is Bitcoin receiving all the crazy attention? What is Bitcoin?
Most of us have read snippets about Bitcoin here and there. But what continues to amaze us is the volatility of Bitcoin:
Today, regulators are still trying to make sense of how they should be handling Cryptocurrencies. Therefore, MAS’s recent move is definitely an interesting one to watch as it signifies a slightly more open approach towards Cryptocurrencies.
On the other hand, in China and South Korea, the regulators have clamped down on Cryptocurrency-related activities. In China, you cannot do anything with Cryptocurrencies. While in South Korea, the Financial Services Commission enforces stricter regulatory policies on Cryptocurrency Exchanges and Virtual Assets Services Providers (VASPs).
Interestingly, the Fed is still sitting and mulling over Cryptocurrencies.
For the purpose of our articles, let’s consider Cryptocurrencies as a type of currency, or asset class, for now. Would it become an asset class? That is hard to say. But, given the attention it has received. And how its value fluctuates according to market sentiments, then it makes sense to say that we can approach it as a type of investment product.
You may have read that ARK Invest’s Founder, Cathie Wood, will offer Bitcoin ETF (pending US SEC approval). She is not the first as VanEck, Valkerie and NYDIG are also in the line up. Morgan Stanley has also started offering “Crypto-products” to accredited investors.
As investors, we ask ourselves the question of whether or not we should be buy any Bitcoin at all.
But before that, we need to understand what we are buying.
Let’s start looking at some key facts of Bitcoin.
The who, when, why and what of Bitcoin
Who: The mysterious Satoshi Nakamoto created Bitcoin. But the real identity remains unknown. There are lots of fun speculations on who he/she really is.
Why: Trust issues. As mentioned, today, if you want to perform a transaction, you will have to go through some kind of intermediary. As long as you go through a middleman, you pay afee, and you will have trust issues. Can you trust your bank? Can you trust the money changer? Can you trust the system you are interacting with?
What: In fact, Satoshi suggested a peer-to-peer transaction where we send money to anyone in the world without any third party and without worrying about double-spending. For the brave ones, you can read the white paper here.
Is Bitcoin good for us?
We will save the “How” of Bitcoin works in the next article. But you might have already heard of how Bitcoin is decentralised.
In Singapore, where we trust our central authorities, there might be lesser need for using Bitcoin or other Cryptocurrencies. The same can be said for countries like China, Switzerland and Australia. But in certain countries where there is very little trust towards the central authorities, Bitcoin might be a life-saver.
Simply because, everyone on the Bitcoin network is watching everyone else.
II send money using my DBS bank account to your UOB account, only DBS and UOB will be tracking that transaction. But, on a Bitcoin network, everyone is tracking it.
If a person wants to change a particular entry in the ledger, he cannot just change his own ledger. Instead, he needs to change the copies of the ledger that are held by many other hundred thousands of people.
This is impossible.
Then you think: “Hey this is great! Decentralised means no concentration of power, right? And that’s always good for consumers, aye?”
But hold on a minute – this is where most people get confused.
What does it mean by decentralisation?
Decentralisation should not be treated as “all-or-none”. But rather as a spectrum.
This is thought-provoking and fun:
Depending on how you analyze the data, it’s interesting to note Bitcoin ownership is concentrating on thousands of people. These lucky people are called “Bitcoin Whales”. There is recent data pointing to the increase in Bitcoin Whales, which seems to suggest institutional investors are entering into this space.
For decentralisation, yes, this could be good in certain countries.
For countries whose nation’s currency or monetary policy is weak, Bitcoin presents itself as an alternative.
Cryptocurrencies are volatile.
When another country’s or company’s alternative currency enters the market, it also affects the central bank’s monetary policy. This becomes complicated (we will explore this another time).
Afterthoughts about Bitcoin
Here are a couple of take-home questions for everyone:
- There’s a limited Bitcoin supply. And a hard cap of 21 millions coins to be mined. Once that number is reached, what will happen?
- Can people still make money from “mining”?
- How would the supply be managed?
- Can you still buy Bitcoin?
We’ll tackle this in our next article by looking into the inner-workings of Bitcoin.
Investing can be simple, but understanding Bitcoin will take some time and patience 🙂
Keep it up. Thank you.
For Cryptocurrency to be classified as an Asset Class that is traded like a stock in a Stock Market, what then will be its fundamentals and technicals to support its value?
By the way, thank you for your reply to my question in the first part a few weeks back.
Hi Eric, I am absolutely sorry for missing out on your comment.
Let me attempt to answer this in a few ‘tranches’:
Hope this answers your questions for now!
Thank you for the reply and clear explanation.
My apologies for this late reply to you.