What is Bitcoin?

Bitcoin is a currency that was founded/discovered pretty recently in 2009 by a person (still unknown) using the alias Satoshi Nakamoto.

The good thing about transacting using Bitcoin is that there will be no middleman required to do the transacting.

There are also no fees tagged to transacting with Bitcoin and no requirements to provide our real name.

Sounds good right?

Bitcoin’s Price Performance So Far

Image credit: Bitcoin.com

The performance of Bitcoin is nothing short of spectacular in recent times. There is a lot of hype around it no doubt.

If you did not manage to take advantage of the rally in Bitcoin, do not despair. I did not too.

For those that managed to take advantage of it, my heartiest congratulations to you! 🙂

My Opinion on Bitcoin

So, what do I think of it? Will I buy it? Should you buy it? Should you sell it?

Now we all know that Bitcoin is a currency. It is like US$ or SG$, but the difference is that it can be a global currency – backed by the blockchain technology behind it.

Bitcoin being a currency means that it can be used to buy goods and services (provided that more vendors would accept it).

Here’s the thing.

With the recent increase in price, if we are a vendor, will we want to accept bitcoin when we sell our goods and services? Maybe we want, but at how many bitcoin should we priced it at?

The instability of the ups and down in price of Bitcoin makes it hard for vendors to tag a price to the stuff they are selling.

And as a buyer of the goods or services, will we want to give away our bitcoin?

Say the current price of Bitcoin is S$20,000 and we want to sell a house for S$700,000, do you think the seller of the house will want to sell it for 35 bitcoins? Maybe some will but my guess is most won’t. And since most won’t, it is very hard for it to be used as a currency. At least not now when the price is still so unstable.

2 Fundamental Question to Ponder:

1. Why Do People Buy Bitcoin?

If most people buy bitcoin as a store of value like gold because of its limited nature, it will not be a widely used platform for people to buy and sell goods and services. We do not see many people buying and selling stuff with gold, do we?

If most people buy bitcoin to buy and sell goods and services akin to a currency, it will not be a suitable store of value like gold. It is merely like another source of currency like US$ or SG$.

Overall, I think that most people buy Bitcoin as a store of value. The bull thesis hinged upon the fact that Bitcoin’s supply is limited to only 21 million coins.

Hence limited supply and increase in demand and hype resulted in the increase in price.

But my question is that, does something which is limited means that it is worth buying? It has to provide some sort of mass-usefulness (like land) combined with the limited nature to result in the price appreciation over time.

2. Can I Value Bitcoin?

In making a judgment when investing in any assets, I think that we need to know what is the value of those assets. And then we buy those assets below the value that we calculate it to be. That is called investing.

Now, I do not think that we can value Bitcoin.

Bitcoin produces no cash flows, no dividends. It is not a value producing assets. Hence even though I think that most people think they can buy Bitcoin as an “investment,” it is not the case. As Professor Aswath Damodaran, the New York University ‘dean of valuation’ says “Bitcoin is not an asset, but a currency, and as such, you cannot value or invest in it. You can only price it and trade it.”

Bitcoin is a currency, and it does provide certain security.

But then again, it is not that secured isn’t it if we chose the wrong marketplace to buy and sell our Bitcoin? Yesterday hackers stole $64 million of Bitcoin from Cryptocurrency mining marketplace NiceHash  [as reported, in Reuters]).

In Conclusion (Summary of My Opinion on Bitcoin)

Most people buy Bitcoin as a store of value like gold. Gold in itself is like Bitcoin, is not a value producing assets but it is historically a popular assets class for people to park their money due to its limited supply. But gold has a certain usefulness too, for jewelry. Why do people buy Bitcoin? For show? For transaction?

Right now my opinion is that Bitcoin is still neither a store of value like Gold nor a type of currency to transact around the world. It is still at quite an early stage to determine.

Either way, right now I do not think that it has the stability of Gold nor it’s usage as a currency as it is not a widely used currency yet (will it ever be? maybe, but most probably not if too many people are dabbling in it making its prices so unstable to do any transaction).

The sky is the limit as to how high the price of Bitcoin will go. And there is nothing wrong with trading Bitcoin. But it is important to know the difference between trading and investing. Do not assume that we are investing in Bitcoin when there is no way to derive value from it as it is not a value-producing asset. We can only trade Bitcoin and make lots of money from it – if we are good – but we cannot invest in it (because we cannot value it as it is not a value-producing assets).

We can always ask ourselves this first before buying Bitcoin: why do we buy Bitcoin?

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