Retail investors & Bitcoin

Very few among the retail investors would have missed to hear the term "Bitcoin",  though very few amongst them would have an understanding of what it is all about.  With bitcoin's price breaching the US Dollar 20,000 mark & lots of stories floating in the internet on millionaires from bitcoin around the world, a FOMO tendency (Fear Of Missing Out) is slowly building up amongst the retail investors as it looks like a way to become rich quickly.  The bitcoin price graph for the past 10 years clearly captures the prevailing euphoria on its prospects in the market:

Bitcoin Price History in USD


The intention of this post is to explain the concept & features of bitcoin so that retail investors can take an informed decision.   

What is a Bitcoin

Bitcoin is a decade old concept. It was launched in 2009 by Satoshi Nakamoto. The strange thing to be noted is no one knows who is Satoshi Nakamoto. Whether it is a person or a team's sudo name is also unknown till date though the white paper submitted by Satoshi Nakamoto is being widely used as a reference point for cryptocurrencies. 

Satoshi Nakamoto proposed Bitcoin, an independent currency without any Government or Central Bank regulation, post the 2008 financial crisis, which questioned the efficacy of the present financial system. The white paper is available in the link given below:

https://bitcoin.org/bitcoin.pdf

Apart from the ICO (Initial Coin Offering), subsequent bitcoins have to be "mined". The "bitcoin mining" is a process wherein complex mathematical calculations/processing, which are obviously irrelevant, are "rewarded" with "new bitcoins". Hence, the process of creation of bitcoins is difficult & complex and this aspect alone gives "value" to bitcoins because there is limited supply. 


Bitcoin & Gold

A parallel for bitcoin valuation can be seen in Gold valuation. Gold has been used as a form of currency for more than 2,000 years.  Gold has no industrial usage, but still it is considered as an inflation-proof investment. Gold is one asset which can be sold in any part of the world at any point of time.  It's a true global currency. Till the 1970s, country's central banks had to hold an equivalent value of the currency in circulation as gold; Alternately, the currency published by a central bank derived its value from the Gold. In the early 1970s, this gold standard was broken by the US Government promptly followed by all other countries as it gave the Central Banks, the right to print currencies at will, though it may stoke inflation prevailing in the economy.


Is Bitcoin for Retail Investors?

Now, comes the big question. Whether a retail investor should invest his hard earned money in bitcoins? The opinion of the most successful investor of our times matters on this aspect.

Two quotes given below from an interview of Warren buffet highlights his view on Bitcoins as an investment in an unambiguous manner:

        "I don't own any cryptocurrency & I never will"

        "Cryptocurrencies basically have no value and they don’t produce anything"

Reference:https://www.cnbc.com/2020/02/24/warren-buffett-cryptocurrency-has-no-value.html


Bitcoins & Central Banks

In India, Bitcoins were banned by the country's Central Bank in April 2018, which was lifted by the country' top court in March 2020.  Various countries like China & France are in advanced stages of launching their own cryptocurrencies, generally, terms as CBDC (Central Bank Digital Currency). JP Morgan Bank became the first Banking Institution to launch its own cryptocurrency viz., JPM Coin in February 2019. This is a dollar-backed cryptocurrency to serve institutional clients in order to facilitate interbank payments  on the Interbank Information Network (IIN).


Future of Bitcoin

The future holds the key if the bitcoin rally will fizzle out eventually or will reach dazzling highs as is being predicted by some of the bitcoin supporters presently. If at all a retail investor wishes to participate in the bitcoin rally, it would be prudent to restrict oneself to a minor percentage of his investment corpus considering the lack of support, rather hate, for Bitcoins amongst the world's Central Banks considering that it is challenging their very existence. 


A positive side effect of Bitcoins

While the success or otherwise of Bitcoin is still being hotly debated, there is a general consensus that the technology behind cryptocurrencies i.e. Blockchain is definitely going to revolutionize the manner in which business is conducted across industries by ushering in the much needed trust & transparency in the business dealings. 


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