Is Bitcoin a Bubble Waiting to be Burst or a Disruptor?

Usually I will spare an hour a day to uncover potential public listed companies in Malaysia and around the world. However, I’ve been getting a lot of questions on Bitcoin. As a Malaysian myself, it is important for us to be aware of the current cryptocurrencies hype. These are the few insights you should know about Bitcoin besides their recent price hike.

Bubble or Disruptor?

You will need to judge yourself after reading these facts. Today, investors are very much focused on the speculative profit rather than the blockchain technology which give these cryptocurrencies its intrinsic value.

In every equity assets, their values are supported by the company’s growth and expected dividends. Cryptocurrencies however does not provide any dividends hence the only intrinsic value is their Convenience Value. It is as simple as if people use Bitcoin as a medium of exchange, they have a value. Bitcoin having the characteristics of decentralised structure and easier to carry than fiat currencies (all you need is to carry a smartphone) certainly shows that it has Convenience Value.

A question that we should ask is investors buying Bitcoin to make transactions as an alternative to cash/credit cards or benefit from its increasing price trend? So I did asked a few basic questions to understand investors and market sentiment about bitcoin (30 samples). You can also ask the same.

How many have heard of bitcoin? Answer: Everyone

How many had bought bitcoin? Answer: About 5/30 people

How many had used bitcoin to buy something? 1/30 people

This clearly shows that Bitcoin prices are fuelled with speculative behaviour and not as a medium of exchange to replace fiat currencies.

Is Bitcoin sustainable?

The costless bitcoin transaction is long gone. Fees have ranged from USD 5 to USD 55 per transaction depending on network’s available capacity. This phenomenon makes day to day transaction from purchasing online goods, coffee to small transactions increasingly impractical.

In addition, Bitcoin transaction consumes electricity at a shockingly high level. One transaction takes about 1000 times more electricity than a transaction made through a credit card. Take a look at this index. The cost per transaction is currently at 258 kWH which is enough electricity to power about an average Malaysian household for a month!

Bitcoin Flow

Source: Financial Times

Will this electricity consumption continue to rise? You will need to understand how Bitcoin blockchain works before answering this question.

As you know, the number of Bitcoin is limited to 21 million and 16.6 million are currently floating in the market. The scarcity of Bitcoin means every bitcoin miner will need to solve even more difficult mathematics problem with super computers to approve a transaction. For every successful transaction, the said miner will be rewarded with bitcoins. This is the only reason why they (miners) spends so much in electricity and computer hardware to compete with other miners. Hence, the increase in scarcity of bitcoin will only leads to the increase in electricity consumption to sustain its network. Next question to ask is what if Bitcoin value is less than the electricity consumption? Who will continue to mine (to approve bitcoin transaction) with negative returns?

Bitcoin Network

Can Bitcoin be the new decentralised currency?

To be new currency and replaces fiat currencies, bitcoin transaction has to be efficient in term of transaction time. In other words, the transaction using bitcoin has to be confirmed 100% and completed within an appropriate time frame. However, the current bitcoin blockchain technology has this constraint where it takes too long to complete a transaction. Currently it takes about ten minutes to an hour to complete a transaction. This means it could not fit into our modern and fast moving society.

My Insights

Bitcoin blockchain technology has certainly gave rise to many forms of cryptocurrencies and new technology such as Hashgraph. Due to certain constraints in its blockchain technology such as heavy electricity consumption and slow transaction time, I do not foresee that the cryptocurrency could replace our current financial system or banks as a new form of currency. If Bitcoin is not suitable and not ready to be an exchange medium, why its prices soared to USD 258 bil market cap as of 23rd December 2017? This is something for us to ponder upon.

“When something is too good to be true, always be sceptical and avoid having herd’s mentality” – Norman. Y

If you would like to receive more articles about Investing 101, do subscribe to this website. You can also check out some of my past articles on REITs or get some investment ideas by browsing through my articles on companies analysis.

An equity investor and co-founder of Stocks Insights. Prior to this, he was attached with an International Bank in Private Banking segment serving sophisticated high net worth clients. He has also passed Certified Financial Planner's examinations during his engineering undergraduate degree.

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