Bitcoin. It seems to be in the news round-the-clock. But what is Bitcoin? Why are people talking about it all the time? This article will shine some light on this new kind of money, so you'll get a bit more of an understanding what Singapore's perspective on Bitcoin is, particularly as Singapore is poised for Smart Nation status.
Bitcoin is a new revolutionary kind of money that was released with the aim to complement, or perhaps even supplant, fiat money, i.e. the way we've been using our dollars, euro, yen etc.
Bitcoin is without a doubt potentially disruptive to a number of industries, particularly Finance in general and Banking in particular. As Bitcoin becomes mainstream, which the pivotal year of 2017 has shown it has, we'll see huge tectonic shifts occur in the realms of payments, remittances, wire-tranfers, amongst others.
But let's backtrack a little. Let's take a micro look at Bitcoin first, after which we can have a more macro look.
Bitcoin is a cryptocurrency - also known as a virtual or a digital currency - that was published for the world to use by a cryptoscientist called Mr Satoshi Nakamoto. Mr Nakamoto's current whereabouts aren't known, due to the fact that he vanished shortly after acknowledging that Bitcoin could henceforth stand on its own two feet.
In fact, we don't even know if Mr Nakamoto was a man or a woman. Perhaps the origin of Bitcoin was a group effort, we just don't know.
However, what we do know is that the rationale for Bitcoin's conception is the discontent its creator(s) had for the contemporary money system. The biggest bugbear? As money is no longer attached to the Gold Standard, central banks have been adding fresh money to circulation by the trillions.
Helicopter-money, quantitative easing, bond-buying, call it what you will, the bottom line is that money liquidity is increasing every single day in most nations. Worse, it appears economies have grown dependent on these endless money injections.
Governments claim quantitative easing is necessary to keep their economy from faltering. At the same time, conveniently, creating ever-more money also lowers the debt load these same governments are now facing. After all, the more money in circulation, the more this money loses its value through inflation.
And this is the crux of the matter. Inflation undercuts the people's money insofar as savings, trusts, pensions, in fact, all moneys that are being saved for a rainy day, bleed value ceaselessly as long as money printers continue to churn.
To understand what this means in practice, take a look at this hypothetical example of Alice's $100,000 nest egg. Even though Alice never taps into her savings, the purchasing power of her $100,000 slips to a theoretical $88,513 in just 7 years. And that's at a conservative rate of 2% inflation. To be sure, Alice will receive some interest from her bank on these savings, but in this kind of interest rate environment, interest earned is typically negligible.
In a nutshell, nowadays, all money that isn't somehow being spent oozes value nonstop. In effect, everyone is forced to continuously spend their money, or better yet, take out loans. And this is the whole purpose of inflation, i.e. to grease the world's economies. No one is to blame as such, but the system is far from perfect. And really, all this debt cannot remain unpaid for ever; sooner or later there will be a day of reckoning...
Bitcoin approaches money from a different angle. For starters, the maximum number of Bitcoin in circulation will never exceed 21 million. So right off the bat, Bitcoin cannot be inflated. This scarcity ensures that one Bitcoin's value will never slip. It may, in fact, gain value over time instead, since, rather than being subject to inflation, Bitcoin is somewhat disinflationary in nature.
In other words, as long as you hold on to your Bitcoin, its value will appreciate versus most regular currencies.
Now, at this point, you may want to know how Bitcoin derives its security. Is Bitcoin safe at all? Actually, even Bitcoin's detractors are agreed on the fact that Bitcoin's security is top-notch, given that it's the Blockchain, a computer-based protocol that ensures Bitcoin is immutable, uncensorable and, for all intents and purposes, unhackable.
This is at least part of the reason Bitcoin, apart from just being a currency, has also assumed the role of robust, non-correlated safe haven store of value, a job traditionally taken on by gold. As it happens, Bitcoin has even been called Digital Gold. What's more, a case can even be made that Bitcoin is a better
store of value than gold.
But let's not lose track of the fact that Bitcoin's intended raison d'etre was to be a currency. As such, Bitcoin has a number of major edges over fiat currency. This applies especially to transecting funds on a global scale. Let's face it, if ever there was a business ripe for disruption, it's that of cross-border money transfers.
Most banks or remittance outfits charge up to $75 or more for a sum of $1000 to be transferred to another continent. It may be higher if the fee involves a percentage of the sum in question. For this, the recipient may have to wait "up to 3 to 5 working days", or longer for the money to arrive. Furthermore, for the privilege of receiving this money, more often than not, the recipient will be charged another "handling fee".
And let's not forget the fact that oftentimes we're dealing with different currencies, yet another money-making opportunity for the participating banks. (Hello, exchange rate margin).
Now let's look at an example involving a Bitcoin transfer. An intercontinental Bitcoin transfer valued at about $1000 would cost about $1 and would take minutes to complete, at most. And no conversion fee of course.
What's not to like?
All that being said, perhaps we shouldn't get too far ahead of ourselves. Yes, Bitcoin has immense potential and its trajectory is showing that it has no problems fulfilling that potential. But for now, as is typical in the case of young developments of this magnitude, Bitcoin has some maturing to do.
In many ways, the internet of the early 1990s displayed a lot of similarities to where Bitcoin is now. Especially those industries most likely to be disrupted by the internet. The music, publishing and movie industries back then left no opportunity unused to repeat the same old chestnuts over and over: the internet is a danger to society, its only used by nefarious drug pushers, illegal weapons dealers and illicit porn peddlers.
Then, like now, the naysayers would contstantly try to invoke the government by predicting outright bans. Of course these bans never happened. Instead, the music, publishing and movie industries had no choice but to suck it up.
These days, we're hearing the same desperate incantations, this time from members of a different incumbant old boys network, Finance Corp. But like the internet, Bitcoin too, will reign supreme, even if there are a few bugs and teething problems that need to be ironed out first.
Bitcoin is here to stay. Live with it.
Now, in terms of Singapore, Bitcoin is likely to start taking on quite an important role, given Singapore's Smart Nation
aims. And with FinTech's traction gaining relentlessly, it's safe to say that in this light alone Bitcoin has a bright future ahead.
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I am not an investment advisor and above article is for purely informational purposes and is not to be taken as investment advice. Investors are advised to personally undertake adequate due diligence, or to consult a financial advisor in order to determine what assets - if any - are appropriate to invest in.