The Saint · 18 February 2021 · illustration by Liu Rui
Originally published in The Saint, and recreated here (lightly reformatted) as the original is no longer online.
The meteoric rise of Bitcoin is hard to ignore. Especially since the latest announcement about Tesla's massive $1.5bn investment in the cryptocurrency, after which bitcoin reached a new record-breaking high of almost $48,000. Everybody is now wondering the same thing: "Should we also invest in bitcoin, or not?"
It is important to understand what bitcoin is to comprehend why it's such a popular investment. Bitcoin is essentially a piece of software. It allows users to trade digital "coins" whose worth is determined by how much someone is willing to pay for them. The idea behind it was that users would be able to create a "peer-to-peer electronic cash system".
This would be free of middlemen such as banks — it is no coincidence bitcoin sprung up in the depths of the financial crisis, when confidence in big banks was at its lowest. With the tumbling dollar and reducing confidence in the central bank, many believe bitcoin is the future for financial transactions, and this is becoming even more apparent in the pandemic. It is open to anyone who owns a smart device, with no restrictions on its use, and much more transparent and secure than corporate banks — making it appealing for the common public, who finally get the chance to manage their own wealth.
With such upside, naturally the demand for Bitcoin has reached the point it has today. Unlike 2017, when the hype was driven by individual investors, today the momentum is being driven by large institutions and groups of professional and amateur investors. It is being legitimised, in a sense. Fintech companies like PayPal, Robinhood and Square now allow purchases and exchanges of the cryptocurrency; BlackRock, the biggest asset manager in the world, has allocated funds to it. Now that Tesla has broken the ice, it is only a matter of time until other major corporations follow.
With growing demand at both the individual and institutional level, bitcoin is expected to grow even further, with predictions as high as a million dollars.
Another reason for its rise is that, unlike a regular currency such as the pound, bitcoin isn't infinite. The Bank of England can always ask the money printers to create more banknotes, or achieve a similar effect through its bond-buying programme; for bitcoin there is a hard limit. Due to the way it was created, only 21 million can ever be mined — of which 18.6 million already has been. In theory, this scarcity is another reason the value of bitcoin should never decrease.
Technically, bitcoin's fundamental value is zero — or even negative, once a carbon tax is applied to its massive, energy-hogging production. Did you know that, according to Cambridge University, Bitcoin consumes more electricity than the whole of Argentina? Just because it's not paper-based doesn't mean it's environmentally friendly.
The reason its intrinsic value is zero is that bitcoin is a non-productive asset: investing in it doesn't mean investing in an asset's potential to generate revenue, but rather in what people believe its value is or could be. Now, isn't gold a non-productive asset as well? The issue with that comparison is scale — gold's market cap is north of $12tn, whereas bitcoin's is only $420bn. Bitcoin's market is small enough to be significantly moved by a single large investment (Tesla's $1.5bn being a case in point), which makes it extremely volatile and risky. The current surge was primarily triggered by rookie investors who don't necessarily understand the market. In the 2017–18 crash, bitcoin went from $1,000 to $20,000 and down to $3,000, all in a little more than a year.
The praise for its decentralised system, and its potential to become the framework of our financial institutions, isn't all that genuine in reality. Firstly, bitcoin is a near-perfect money-laundering vehicle: since anybody can buy with no regulation at all, it is very easy to buy with illicit money, and the system is decentralised enough that it is almost impossible to know whether a transaction is legitimate. Secondly, there isn't enough bitcoin to go around — with only 21 million available, it is a supply-shortage problem. As demand grows and supply tightens, a situation similar to the oil industry could emerge, where major mining companies monopolise on the scarcity — sending ripples across the global market when it all comes crashing down.
In totality, it is all simply a big risk, because no one can say for certain what is going to happen. In the short run, given the momentum bitcoin has, prices may keep climbing; but in the long run there are just too many uncertainties and potential risks to go all-in on bitcoin.