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An unhappy birthday to Bitcoin

22012018 Bitcoin alternative

An unhappy birthday to Bitcoin

Bitcoin, the original decentralised digital ledger that spawned a wave of speculative cryptocurrencies, turned 10 years old this week. Born from a nine-page whitepaper published under the pseudonym Satoshi Nakamoto on October 31, 2008, Bitcoin promised to be a “peer-to-peer electronic cash system” that would eliminate the need for trust and hence the reliance on a centralised authority. One wild decade later, has Bitcoin fulfilled its promise?

A quick gander through your local (online) shopping mall would suggest an emphatic “no.” Bitcoin has failed to gain mainstream adoption as a payment system, not least because of internal limitations that have led to widespread bottlenecks and surging transactions fees. But leaving aside the technical shortcomings of Bitcoin, the psychological barriers to its adoption as a payment system are readily apparent as well. Bitcoin remains an enigma to an overwhelming majority of the global population, and the lack of a “trusted” centralised authority discourages the average un-tech-savvy consumer from adopting it as a transactional currency in any meaningful way, even if vendors were to openly embrace it (which they haven’t).

Bitcoin’s feverish climb to nearly US$20,000 in late 2017 and its subsequent collapse haven’t helped either. Since its peak, Bitcoin has fallen nearly 70 per cent and is negative year-over-year for the first time since 2015. One fundamental requirement for a sound currency is stability, which Bitcoin clearly lacks. If the value of a Bitcoin can skyrocket by an order of magnitude in a short space of time, who would spend it today rather than hoard it for tomorrow? Likewise, if its value can reverse into freefall just as quickly, which vendor would risk accepting payment in Bitcoin? There are good reasons why international transactions are typically denominated in USD rather than Argentine pesos or Venezuelan bolivars.

Bitcoin backers are now trying to reposition Bitcoin as a store of value rather than a medium of exchange. It is often referred to as digital gold due to its finite supply and the fact that it can’t be debased by inflation. Per The Wall Street Journal, one cryptocurrency investment firm calls Bitcoin “a millennial’s version of a Swiss bank account, for every person in the world.” However, this characterisation is also problematic. The price of Bitcoin has been significantly more volatile than gold, which makes it an unreliable store of value. Neither Bitcoin nor a brick of yellow metal have an intrinsic value, but at least the price of gold is underpinned by economic factors such as inflation, while the jury is still out on Bitcoin. The only similarity to a Swiss bank account is the privacy, which comes with the added concern of security.

The global team has previously written about why Bitcoin is uninvestable, but Bitcoin’s identity crisis has made even speculation difficult. Without a clear path to widespread acceptance as a payment system or a store of value, even the most ardent backers may find it harder to articulate why Bitcoin should be worth $10,000 or $100,000 rather than $1,000 or zero.

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Daniel Wu is a Research Analyst at MGIM. Prior to joining MGIM in June 2016, Daniel was an analyst in the investment banking divisions of UBS and Goldman Sachs, where he covered the Infrastructure, Utilities, Technology and Media sectors.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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Comments

  1. Most exciting thing is the block chain technology itself (definitely not Bitcoin) Blockchain is being used widely in many industries, mainly by financial services industry and imo most likely will become more relevant especially with AI. As for Bitcoin itself its purely speculative/gambling…..with many risks and numerous cons. Would not be surprised to see its value plummet, just a matter of how far down the road. Any ideas on specific companies that are or may benefit from the technology?

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