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The recent surge in bitcoin prices has reignited the media's age-old hostility, with the Canadian newspaper The Globe and Mail publishing an article titled "The Trouble with Bitcoin: Why the Cryptocurrency Mania Can't Sustain." True, Bitcoin can be taken to extremes, but the claim by its hardcore fans that the cryptocurrency will soon replace gold and all government-backed currencies and credit cards, while also upending the banking system, is intellectually appealing but unlikely to come to pass, at least in the short term. On the other hand, media commentators often speak ill of Bitcoin, calling it a worthless speculative tool, an environmental disaster, a bubble, or worse. A Bitcoin statue is installed outside a cryptocurrency mining plant in Norilsk, Russia, on December 20, 2020. Photo credit: ANDREY RUDAKOV—BLOOMBERG/GETTY IMAGES It is a shame that investors have little opportunity to make a frank and sober analysis of these facts. As a new asset class, investors must fully understand Bitcoin and then carefully consider its risks before investing. Therefore, from this perspective, it is necessary for us to clarify the following common misunderstandings about Bitcoin: #1: Bitcoin is only for speculation This is not accurate. Every day, the Bitcoin network processes about $10 billion worth of transactions. Bitcoin's 305,000 daily transactions are not much different from the 550,000 daily transactions of Fedwire, the Federal Reserve's wire settlement system between financial institutions. Some of these transactions are investment purchases, and some of these transactions may be speculative investments, but many of them are for regular uses, such as remittances, especially in the global south. For example, the World Economic Forum says that 32% of Nigerians hold Bitcoin for P2P payments. In Russia and Belarus, Bitcoin is sometimes the only way to finance anti-corruption initiatives and protests. It is also very practical. #2: Bitcoin wastes energy Bitcoin "miners" use a lot of computing power to build the Bitcoin network. These computers use a lot of electricity, and some estimates say that their consumption is equivalent to the electricity consumption of Chile. This phenomenon has also brought Bitcoin a reputation for energy waste. Energy is wasted only on things that people don’t think have a useful function. The Bitcoin network is worth $1 trillion and serves tens of millions of people, including many who don’t have access to traditional payment networks. Miners tend to cluster in areas where electricity is plentiful or free, often using renewable energy sources such as hydroelectric or geothermal. Today, at least 39% of Bitcoin mining is powered by renewable energy, and that share is growing rapidly. FedEx, TikTok, and the U.S. Department of Defense also require a lot of energy to operate. There is no doubt that Bitcoin’s carbon footprint is a problem that needs to be solved. However, this does not mean that Bitcoin is a bad idea. Instead, this carbon footprint is an implementation challenge to be overcome, just like every other functional entity. #3: Bitcoin is too volatile. Not very suitable as a store of value There is no doubt that Bitcoin is more volatile than government bonds, but this is not a problem with Bitcoin itself. In the 1970s, when the monetary system officially adopted gold, its price was extremely volatile, increasing ninefold in 10 years, then falling 60% and remaining depressed for decades. As the price of gold continued to rise, its volatility also hit new market highs. Sometimes, the most volatile assets have the best returns, but sometimes it doesn't. Bitcoin is now in a "price discovery" phase, similar to gold in the 1970s, when wild price swings were common. However, due to its volatility, Bitcoin may not be suitable for all investors. #4: Governments will kill Bitcoin Indeed, Bitcoin has been rejected by governments in Nigeria, Russia, and Belarus, but it has received a different reception in the United States, Canada, and most other Western countries. For example, the top U.S. securities regulator has opened a cryptocurrency course at MIT; the Commodity Futures Trading Commission, the regulator of commodity markets, has played the role of a global innovator in regulating Bitcoin derivatives; and the U.S. Office of the Comptroller of the Currency recently lifted restrictions on banks providing custody services for Bitcoin. Central banks are most concerned about financial stability. For the $1 trillion Bitcoin market, some random and unwarranted suppression is more likely to cause turmoil. #5: Other cryptocurrencies will dilute Bitcoin Since Bitcoin was created in 2009, thousands of new cryptocurrencies have emerged without significantly impacting the price of Bitcoin. This is understandable. When we extract more tin from the earth, do we affect the price of gold? No, because they are not correlated assets. A related comment is that the total supply of Bitcoin is not fixed because Bitcoin can be broken down into small increments. To understand why this is wrong, we can use the example of pizza: if we eat pizza and divide it into billions of pieces, do we have more pizza, less pizza, or the same pizza? Of course not. #6: Cryptocurrencies and corporate currencies will kill Bitcoin It is overly optimistic to expect governments to be technological innovators. Although many central banks have announced central bank digital currency initiatives, most are still at the proof-of-concept stage. Corporate digital currencies, also known as stablecoins, are not a threat to Bitcoin. In fact, they are likely to have the opposite effect. The value of all stablecoins in circulation has surged 40-fold since 2017, yet Bitcoin continues to grow as more and more users become comfortable with using digital assets. #7: “Hot Money” Inflated the Bitcoin Bubble It is true that all risk assets have benefited from the loose interest rate policies of the Bank of Canada, the Federal Reserve and other regions. As bond yields increase and funds flow to more economically sensitive bank stocks, energy companies and other stocks, some beneficiaries of low interest rates, including high-priced companies in the technology sector, have already fallen 30% or more from their share prices during the epidemic. Bitcoin may follow suit to some extent, so sensible investors should be cautious of all investments that have increased in value more than 5 times in a year, including Bitcoin. Having said that, it is worth noting that Bitcoin may benefit from tighter monetary policy, even if it means faster inflation, because many investors will use Bitcoin as a hedge against rising consumer prices. In my opinion, Bitcoin is undoubtedly a catalyst for innovation and may become a future player in the global financial system. Money itself has evolved over the past millennium, from shells to clay tablets, to precious metals, bank notes and bank balances, and it is also moving towards the future in another way: digital. Buying Bitcoin may provide a way to get a glimpse of this future. However, there is no guarantee that Bitcoin will be successful, and this type of investment is not suitable for everyone. Any new paradigm is subject to risk and uncertainty. To understand Bitcoin, first understand the relevant facts. (Fortune Chinese Network) Alex Tapscott is a managing director at Ninepoint Digital Asset Group, a division of Ninepoint Partners LP, and co-author of Blockchain Revolution. This article is for informational purposes only and is not intended as investment advice. |
