Bitcoin: High risk at what reward?

The supply of Bitcoin has already reached 88.7% of its minable capacity.

Interest in Bitcoin has waxed and waned in March.

On 14 March, the popular cyrptocurrency surged by 6.15% to US$60,790.56, but dipped by 1.8% to US$60,077 one day later.

Along with the pick-up of nun-fungible tokens (NFTs) in the visual arts sector came criticism about blockchains, the operating technology of cryptocurrencies like Bitcoin. Critics claim that cryptocurrency mining uses an exhorbitant amount of energy. Supporters claim the criticism is overblown.

Singapore's Payment Services Act consumer protection extends to Bitcoin transactions. But that might not apply if the parties involved in the transaction live outside the Lion City's borders.

Singapore Business Review interviews David Mok, head of investment and research of IPP Financial Advisers, to demystify the cyrptic currency:

What is Bitcoin?

Bitcoin is a digital currency or cryptocurrency that resides outside traditional originators of currency such as central banks to offer a means of financial exchange. It is basically a computer file with a complete log of transactional movements. This digital token is stored in a digital wallet and will register as a transaction when one uses the token, either as a payment or receipt.

Bitcoin is built on a record-keeping database design called blockchain. It is different from a typical database in the way that it stores information. Blockchains store data in discrete blocks and are then linked or ‘chained’ together. For instance, in a Bitcoin transaction, when we receive bitcoins from someone, the address of the sender will be recorded as a transaction input while our address will be registered as a transaction output. The system strings theses entries together in chronological order and therefore, contains information about each transaction such as date and time, total value and the buyer and seller. This ledger allows people to trace bitcoin transactions, facilitating trust and transparency. One of many innovative aspects of the blockchain system is distributed storage of the ledger, enabling integrity and security of the recorded chronological data.

Can Bitcoin become a replacement currency?

If there is enough of a community to trust in the means of exchange, then Bitcoin is certainly viable as a form of currency. Confidence in the currency is paramount. Should, for whatever reason, the confidence ebbs away, then this currency will lose its viability of exchange. There will be no willing buyer of your Bitcoin.

Efficient means of exchange is also important for any currency to become the mainstay of trade. Bitcoin, being sort of a version 1.0 of blockchain technology, does not have within its design, an efficient mechanism and speed of transaction. Janet Yellen, the current U.S. secretary of the treasury and past Federal Reserve chair, recently warned that Bitcoin is an “extremely inefficient” way to conduct monetary transactions. As such, Bitcoin will remain a viable form of currency as long as there is a community that trusts in its means of exchange. To elevate to mainstay currency, its design is currently deemed inadequate.

Is Bitcoin a viable investment?

Bitcoin has already reached 88.7% of its minable total of 21 million coins. There is a limit to the supply of Bitcoins. If the economics of supply and demand holds, then the limited supply should drive prices up, so long as there is demand. Any investor needs to make a calculated guess in the confidence of Bitcoin as a means of exchange going forward. Should you have a positive view, then the dynamics of demand and supply is on your side. Should you think that other competing cryptocurrencies will supersede Bitcoin and demand ebbs, then prudence may win your decision.

Who should invest in Bitcoin?

Anyone can invest in Bitcoin. It really depends on the individual’s risk appetite and the need for the funds. If you need the funds for the future, then you may want to exercise some prudence in face of the risks presented by Bitcoin. If you do not need the funds at all, then you will need to weigh investing in Bitcoin against other investible instruments, according to their respective risks.

There are many ways to invest in Bitcoin. You can buy them directly through cryptocurrency exchanges, traditional stockbrokers, Bitcoin ATMs, or peer-to-peer bitcoin owners. You can also invest indirectly through Bitcoin funds or futures. It will be a good idea to invest in a manner by which you can exit your position as efficiently as possible.

Is Bitcoin stable?

Bitcoin is very volatile. This is evidenced by past data. As this electronic token does not have any underlying tangible collaterals, it is driven by confidence and therefore sentiments. Should an influencer in the likes of Elon Musk or Mark Cuban utters a positive or negative tweet, then it is likely that the cryptocurrency will swing wildly. If you are looking for more stable investments, there are better options.

There has been recent criticism about the supposed effects of blockchains on the environment. Is this a cause for concern, given Singapore's push towards green energy?

There are valid concerns that Bitcoin is posing a threat to the environment. The contention is the energy used by the computers in mining just one Bitcoin. As Bitcoin matures, it gets harder and harder to mine an additional Bitcoin. The bitcoin programme code is predetermined to halve its payout roughly every four years. It was reduced to 25 BTC in late-2012, and recently last year in May 2020, it had further gone down to a block reward of 6.25 BTC. Today, one will need a special high-powered application-specific integrated circuit computer to mine Bitcoin. As such, it is an environmental concern as unnecessary energy is used to generate a digital token when a simple program can do so.