By Peter Nicholl
Bitcoin is back in the news because of a spectacular price rise to over US$50,000.
This surge was triggered by Tesla’s CEO, Elon Musk. He revealed that Tesla had invested US $1.5 billion in bitcoin in January. The reason given was that they were earning nothing on their cash reserves. As I said in my column last month, low interest rates are driving people to take more risk.
At US $50,000, the ‘value’ of the 18.6 million bitcoins that currently exist is a staggering US$1 trillion. That is over five times the annual GDP of New Zealand. I can see nothing about bitcoins that justifies such an enormous value.
Bitcoin was invented by an unknown cryptographer in 2008 – 13 years ago. Lots of articles continue to be written about their great potential as an investment asset or a means of payment. But after 13 years, they have yielded few meaningful uses other than being a good vehicle for speculation and money laundering. Most articles you see are about a single institution that has decided to use bitcoin.
If its potential really lived up to its hype it would have spread much further than it has over the last 13 years.
The proponents of bitcoin say one of its big strengths is that no organisation stands behind and controls bitcoin. They say this means that there is no institution that can manipulate its supply or price. To me, this is its biggest weakness as there is also no institution that can deal with problems like illegal manipulation, fraud – or the more frequent problem of a holder losing their PIN number. If you lose your 12-character PIN, you have lost your bitcoins.
Other large risks involved with bitcoins include:
Failure of an exchange: most bitcoin exchanges are unregulated. If they fail (and this has happened) the unlucky holders of bitcoins have no-one to go to;
Hacking: any market that is operated via computers can be hacked – even the Pentagon has been hacked. The bitcoin exchanges must be a very attractive target for hackers;
Huge price movements: we see lots of stories about the people who made fortunes when the bitcoin price swung up. Probably just as many people have lost fortunes when the price swung down. Their stories don’t make the news.
How do bitcoins come into existence? They are ‘mined’ through a network of privately-owned computers around the world that verify all bitcoin transactions. The largest set of these computers is in Siberia. When I was working in Kosovo a few years ago bitcoin ‘mining’ was happening there too. It is a very energy-intensive process. It is also a very ‘un-green’ process too and, I suspect, an expensive process. This, plus the large swings in the value of bitcoins, make it very unlikely that it will ever become a mainstream means of payments. It will stay on the fringes.
Should one invest in bitcoins now that the price is so high? Only if you can afford to lose most of what you invest. In my view, bitcoin is largely a speculative investment driven by hype. Bitcoins have little intrinsic value. Investing in bitcoins is even more risky than going into a casino. At least in a casino, you know who the casino operator is.