Bitcoins and other cryptocurrencies revisited
Since my column about Bitcoins in this paper came out last Nov. 7, 2017, I got readers reactions verbally and in emails, and was invited to two forums about Bitcoins. In one I was a reactor and in the other one I was the speaker. The continuing interest in Bitcoins is understandable due to the rise in price in December to $19,000 and was hovering at $16,000 last January 6, and $13,000 in January 11, 2018. Considering that it was only $1,100 in January 5, 2017, the price appreciated by 1,200% to 1,800%.
Hundreds of other cryptocurrencies have also entered the market, among them: Litecoin, Ripple, Ethereum, Dash, Monero, Bitcoin-cash and many others. They are generated by similar algorithms and block chain monitoring, and their prices are propelled by programmed scarcity. They are also subject to huge volatility, that the price swings are by thousand dollars or at least 10% daily. Some people made money, others lost, but these are all paper profits and losses until converted into real currencies, which some of the wiser guys have already done.
When Satoshi Nakamoto (who may be a group of programmers) created Bitcoins in 2009, it was envisioned that there will be only 21 billion Bitcoins as the encryption program diminishes the number of bitcoins mined until the total number is reached. As of this time, some 17 billion Bitcoins have been mined. Because it takes enormous amount of electricity to run the mining algorithm/encryption puzzle and the block chain, some groups are actively mining the remaining amount by locating large computers near power plants to take advantage of the lower power rates during off peak periods. Some groups are also using automated programs that buy and sell bitcoins depending on the price movements which tends to accentuate the price volatility to the disadvantage of the small traders.
At the current price of Bitcoins or even at a price of $10,000 each, there will eventually be $210 trillion worth of bitcoins. Considering that the U.S. economy in 2017 was $20 trillion and the total money supply was $11 trillion, bitcoins and the other cryptocurrencies are way out and are purely speculative values. Last week, Warren Buffet commented that he does not know when or how the bitcoin bubble will burst but he believes that it eventually will. And neither he nor any of his companies buy Bitcoin or Bitcoin futures as he is busy enough buying and selling things that he can understand.
Even with all the precautionary warnings by respectable financial personalities, some governments and Central Banks, a number of brokers have started selling Bitcoins and other cryptocurrencies. The Chicago Board of Trade is trading Bitcoins in the Commodity Exchange and there are plenty of online unregistered brokers and dealers. Our Philippine BSP and SEC have issued warning circulars but are also evaluating broker applications. COINS.PH claims to be BSP-licensed and solicits online transactions via cellphones. You register online and remit the payment through 7/11 convenience stores or Lhuillier branches, no bank account is needed.
I maintain the conclusion in my last column that bitcoins are not really currency but a digital commodity, even if it has some characteristic of currencies like limited supply, hard to earn and verifiable. The limited supply and hard to earn is questionable as demonstrated by a hacking incident in 2014 that created bogus bitcoins. The verifiable aspect is acceptable as block chain is really just a shared database in real time. But Bitcoin is not a good store of value due to excessive price volatility, and it is not yet accepted as a mode of payment and a medium of exchange internationally.
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