Going crazy over Bitcoins

BIZLINKS - Rey Gamboa (The Philippine Star) - March 2, 2021 - 12:00am

Preposterous as it may seem, one Bitcoin today is worth about P2.2 million, or $45,000. If you’re an investor or a speculator in cryptocurrencies like Bitcoin, having a couple or more of Bitcoins would rank you as a heavyweight, just like Tesla’s billionaire Elon Musk, who last month announced the company was buying $1.5 billion worth of Bitcoins in preparation for accepting the digital currency as payment for its goods.

By tweeting his company’s intention, Bitcoin’s value soared by 15.4 percent to $44,500, although the currency’s value had somewhat “corrected” in the following weeks to what it is now. Still, in the process, a number of crypto speculators may likely have lost sizeable amounts.

Like Bill Gates, who admitted it in a more recent interview, I too don’t dabble in cryptos although I have invested a fair share of interest in how digital currencies are being run in a decentralized monetary world and how this is upending the centralized system of currencies or monies that most of us know.

If you had bought Bitcoins a decade ago after cryptocurrencies first appeared in the world when it was priced closer to the original $1 per Bitcoin valuation, you would now have a cozy retirement fund had you held on to it through all the ups and downs of the last 10 years.

But if you had treated it as something you could short when the market price was conducive, the value of what you’re sitting on could have been much higher – or you could now be holding an empty bag, worse, may have even lost your shirt.

Cryptoboom end?

Governments are wary of cryptocurrencies at the very least, while some like China’s have even banned them outright. Rightly, investing in cryptoassets generally involves very high risks in an environment where regulatory protection is non-existent.

The recent extreme behavior of Bitcoin early this year, when its value doubled in less than 30 days before dropping 28 percent from its record-high on Jan. 8 had prompted regulatory agencies to issue public warnings.

Skeptics, in addition, are warning that the cryptoboom era will soon end, reminding investors that blockchain-based cryptocurrencies intrinsically have no value.

Understanding fully these warnings comes with an appreciation of how Bitcoin and other similar cryptocurrencies have grown over the last decade, even spawning cryptocurrency exchanges, investment brokers, and hard-wallet makers.

Faith that cryptocurrencies and its inherent and infallible blockchain recording will hold on far into the future to become truly an international currency governed only by its users – without intervention by any government, bank, or company – continues to fuel transactions.

Bitcoins thrive on a community of just 5.8 million unique users, but the value that could be generated through the blockchain’s “Bitcoin-halving” protocol in the remaining 120 years of its life has given it its growing acceptability even to companies.

In 2013, the US government implicitly recognized Bitcoins as legal tender when it established regulatory guidelines imposing taxation on American Bitcoin miners who sell generated Bitcoins. Miners do recordkeeping of Bitcoin transactions, and in return, earn Bitcoins.

Central banks’ response

The emergence of cryptocurrencies has given rise to right wing conspiracy theories, one being the collusion of the world’s central banks to keep a tighter control of the global money circulation and to discredit cryptos from gaining wider use.

China, including 23 other smaller countries, has imposed bans on trading and use of cryptocurrencies as early as 2017. This was influenced by massive reports of scams, stolen wallets, and mismanaged exchanges and investment apps where people lost billions.

In October last year, partly in response to the digitization pressures on monetary transactions because of the pandemic, the Bank of International Settlements (BIS), with seven other key central banks, released a joint report on seeking “common foundational principles and core features” of a central bank digital currency (CBDC).

CBDCs are not to be mistaken for cryptocurrencies, although the former’s relevance can be associated with the latter’s rising popularity.

The central bankers’ report underscored that an active research on the pros and cons of offering CBDCs, but is in no way a commitment to issuing CBDCs, at least until authorities are confident that such would not compromise monetary or financial stability.

The report stated that CBDCs should co-exist with and complement existing forms of money, and that it should promote innovation and efficiency. Extreme supporters of cryptocurrencies have expressed their belief that the traditional monetary system is on its way out in favor of Bitcoin’s decentralized person-to-person currency system.

Four core features of a CBDC system were outlined by the central banks: (1) Resiliency and security to maintain operational integrity; (2) Convenience and availability at very low or no cost to end users; (3) Appropriate standards and a clear legal framework; and, (4) Existence of an appropriate role for the private sector, as well as promoting competition and innovation.

Aside from the scandals involving cryptocurrencies, criticism against it includes the fact that the overwhelming majority of Bitcoin transactions continue to be with cryptocurrency exchanges rather than with retail merchants.

Mining of cryptocurrencies has also been criticized for its massive consumption of electricity, equivalent to what Switzerland uses in a year. More economic scientists have also weighed in on the Bitcoin system as a bubble that can burst any time.

With the current price of a Bitcoin, the urge to earn from this currency has become too tempting for some. Hopefully, the little that have been laid out here can help make for a wiser decision for those who find the opportunity money difficult to ignore.

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Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at reydgamboa@yahoo.com. For a compilation of previous articles, visit www.BizlinksPhilippines.net.

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