You don’t need to be a financial genius to have heard about Bitcoin. In fact, you don’t even have to be in finance to have heard about Bitcoin. These days, most politicians, academics, media personalities, life coaches and their mothers have heard about Bitcoin, and everybody seems to have an opinion about it – from seeing it as untouchable garbage to the commodity of future zillionaires.
But do most people really know what exactly is Bitcoin? Is it worth the hype that floods our headlines? And is it really the next big money-maker that could make your financial dreams into a reality?
Let’s jump in – this is the Commoner’s Guide to Bitcoin and the opportunities and risks that come with it.
A CURRENCY FOR THE 21ST CENTURY
For starters, Bitcoin is a virtual currency. In the Stone Age of finance (concluding about 2.6 million years after the real Stone Age) whereupon computer scientists realized the same Internet which the government uses to store nuclear secrets could be used to post photos from your vacation in Aruba, most investors traded fiat currencies. Fiat currencies are backed by a government via its central bank and their value will fluctuate depending on how many people around the world needed that particular currency to buy things. If more car enthusiasts seek the latest luxury autos from Europe, that means more people convert more money to Euros, and investors bet on the value of the Euro rising. If too many kids get sick from the lead paint in their Chinese toys, then fewer people convert less money to Yuan, and investors bet on the Yuan declining (and China is unsuccessfully sued for the hundredth time in the World Trade Organization!) Essentially, fiat currencies that abide by basic trends in supply and demand seemed to run the world up until a few years ago.
But what if a currency were not backed by any government or central bank? After all, the value derived from a currency can come just as easily from your average buyer or seller as it can from any government-backed monetary authority. Enter virtual currencies, not backed by any government, and completely unregulated, at least initially, by any public authorities. Perhaps this point is more salient to conspiracy theorists seeking autonomy from the globalists and their New World Order, but there is a financial angle as well. Fiat currencies are subject to interest rates and other such measures of market manipulation because at the end of the day, the governments backing those particular currencies want to make more money from their money, so the interest rates you pay when converting to Euros, Yuan, or Dollars could serve to stroke the economic ego of the government that backs it. Virtual currencies were traded on pure supply and demand that came with the freedoms of finding and indulging the latest fads off the world wide web.
Then again, reliance on pure supply and demand is equally risky; just ask any high school student how quickly the latest trends can become yesterday’s news.
Bitcoin, being the first such virtual currency to hit the markets, was no exception to these rules. When people were interested in it and began ‘mining’ – the overly-complicated process for creating and accumulating Bitcoin – for units, its price rose astronomically, and every novice trader received full bragging rights that their one investment produced higher returns than any item in J.P. Morgan’s entire portfolio. Then, when such demand stagnated or declined, the price declined just as astronomically as did the ego of every Bitcoin trader, much to the relief of those anxious traders at J.P. Morgan. Today, Bitcoin is just as volatile, but its hardly the only candy in the sweet shop. In fact, there are over 2,000 shiny virtual currencies available to accumulate and trade. However; for the sake of your eyes, this chart below focuses on some of the most popular products.
That’s the 101 on Bitcoin.
HOLY VOLATILITY, BATMAN!
But is it really worth the hype? According to one survey from ING International, that depends on where you live. Nearly one in five people in Turkey reported owning Bitcoin or a similar cryptocurrency in 2018, as did one in ten people in Romania and Poland. However, among many advanced economies – designated as such by the International Monetary Fund – about 90 percent of people did not own Bitcoin or other such currencies, with Spain leading the pack at 10 percent of Bitcoin buffs, followed by the United States at 8 percent, so somewhere in the ballpark of 26 million people.
Yet, to really answer the question of demand, we also need to look at the commercial side of the coin – no pun intended. According to Fundera, a subsidiary of NerdWallet, about 13,000 businesses accepted Bitcoin in 2018, from a pool of over 200 million. However, this select group of businesses includes some staple names with a massive pool of customers, including Starbucks, JetBlue, and BestBuy.
In essence, Bitcoin and its virtual currency revolutionaries have yet to really penetrate the global currency market. It has made significant inroads in certain countries, with the assistance of some major corporate outlets, yet it is still a niche product held by a handful of speculators increasingly concerned with liquidity, mistrust of financial institutions, inflation fears, etc.
These concerns have been elevated in recent months given the ongoing headwinds posed by the coronavirus pandemic, yet the probability of multiple economic shocks capable of triggering broad-based demand bolster additional demand for virtual currencies is as likely to happen as winning two or more rounds of roulette on 17 black at your local casino.
On top of all those supply and demand issues lies the fact that virtual currencies have an increased propensity to be utilized for illegal activities. According to one study by researchers at the University of Macquarie and University of Sydney, 46 percent of all global bitcoin transactions were used for illegal activities. Therefore, while black market demand could remain profitably strong in good times and bad, it would still be inaccessible to your average, law-abiding, investor.
Yet, even to those investors unfazed by reports that organizations including the Sinaloa Cartel and Islamic State are jumping into the Bitcoin trade, there is still the concern of volatility, which will become an even greater concern in 2021. Volatility – the amount of money you can gain or lose due to changes in price given supply and demand – for Bitcoin, while it is no longer above 100 percent as it was in its earlier years, still outpaces most other traded commodities by a longshot – even fiat emerging market currencies – think the Russian Ruble, Zambian Kwacha, and other such exotic notes – and oil have 6volatility well under 10 percent, while Bitcoin today is close to 50 percent. As the international economy continues adjusting to a post-coronavirus environment, short-term changes in market conditions, interest rates, even political conditions could generate major shifts in supply and demand which would make Bitcoin even more volatile. Discounting its most recent slide in 2020, when it lost almost half its value in a fierce market sell-off due to coronavirus concerns which enveloped every other commodity on the market, it experienced a similar slide in 2017, when it lost almost one-third of its value under normal market conditions.
And beyond the latest coronavirus news, demand for bitcoin could change significantly in the long-term due to the same aforementioned concerns about its usage in illegal activity. Many pharmaceuticals enthusiasts might remember websites such as the Silk Road and DarkMarket, online markets for drug dealers and users trading almost entirely on Bitcoin. When authorities finally shutdown these websites, the decrease in demand was large enough to create ripples that affected law-abiding Bitcoin traders. Plus, some Bitcoin buffs might recall the notorious Mt. Gox incident, the world’s largest Bitcoin exchange that was perfectly legal, but had as much security as a child’s lemonade stand, leading to several hacks and its eventual bankruptcy. Furthermore, with new reports that Bitcoin and other virtual currencies are finding their way into the hands of notorious terrorists, it is likely that countries could develop regulations that create new hurdles in accumulating or trading these products, which could all affect the fragile demand of Bitcoin.
TO BUY, OR NOT TO BUY – THAT IS THE QUESTION…
So, here’s the million-bitcoin question: are they worth the investment? Well, on one-hand its hard to argue with 400 percent annual returns, which Bitcoin has proven more than capable of producing in its mere decade-long lifespan. But with gains come losses, and without a hot tub time machine to the future, traders who’ve staked their net worth in Bitcoins may never really know if and when that could come to a painful crash. Therefore, it is important for anxious traders to only invest what they can afford to lose: no third mortgages on the house, no retirement savings, etc. While it is tempting to live on a prayer and stake everything you’ve got, it is far better to risk a small amount and have the patience to see it grow. And hey, if Bitcoin is really worth the pixels it’s printed on, then even a small amount of Bitcoin will be well on its way to generating the kind of returns you’ll need for your future yacht and private helipad. At the end of the day, isn’t it better to have a budding bitcoin account with the guarantee of a house, car, retirement, and other such luxuries, than to have a budding bitcoin account with no guarantees at all?