How high will it go? The recent euphoria over Bitcoin certainly caught the attention of many investors as the cryptocurrency soared past USD17,000, a remarkable 17-fold increase since the start of the year. Many wealth builders lamented that they had missed the boat of opportunity. While on the other hand, experts warned of an explosive bubble forming. In this article, I will share my view on Bitcoin and whether it is worth to invest in this digital currency.
Dawn of new currency
When it comes to investing, ignorance is not bliss. Therefore, it is important to look at both sides of the coin (no pun intended!) before making judgement. To put things into perspective, Bitcoin was first invented at a time of tremendous financial chaos – the Great Financial Crisis in 2008. Many young investors new to the money game may not be aware of the crisis of confidence in the financial markets back then. All over the world, people’s confidence of the banking systems were shaken to the core when Citibank, then among the world largest banks, was almost brought down to the knee.
Singapore was also not spare of the crisis either and the government was forced to intervene. The government announced in October 2008 that up to S$150 billion of past reserves had been set aside to guarantee deposits in Singapore until the end of 2010. The guarantee was supposed to cover all Singapore dollar and foreign currency deposits of individual and non-bank customers in banks, finance companies and merchant banks licensed by the Monetary Authority of Singapore (MAS).
Luckily, no financial institutions had failed in Singapore and hence, there was no drawdown of the $150 billion past reserves. Nonetheless, the crisis had made people all over the world to question the role of fiat currency and the banking system. There were calls for an alternative currency to replace the money system. One that would transcend the test of time and withstand unforeseen economic crisis.
Gold and money
In the medieval times, there was no such thing as money. But clearly, our society needed a form of medium to trade for services and goods. Precious metals such as gold and silver had been used as a form of barter trade. In fact, as recent as the 1930s, many countries still pegged their national currencies to a value linked to gold. By 1970s, however, most countries had decoupled the value of their currency from the gold standard. Replacing the gold standard was the fiat currency.
What is fiat currency? Basically, it is the face value of the note determined by the government. For example, that piece of $50 note in your wallet does not actually have an intrinsic value worth $50. The basis of the value is actually derived from several factors, such as Gross Domestic Product (GDP), national debts, demand and supply of the currency, political stability, interest rates, trade balance and inflation. At the end of the day, that piece of $50 is a legal tender that is backed by Singapore government.
It is important to note that fiat currency can be controlled through monetary and fiscal policies. This means that governments can manage the supply of money through printing. However, in doing so, the demand would drop and inflation would set in. This means that over time, there will be a decreasing purchasing power of your savings in your bank.
To illustrate, the value of SDG10,000 in today’s context is vastly different when compared to 30 years ago. You could possibly buy a lot of big ticket items in the olden days with this sum of money but definitely not today. At least not in Singapore.
Following the massive financial crisis, Bitcoin rose like a phoenix from the ashes. The cryptocurrency was envisioned to be a medium that allows one to exchange for goods and services without the intervention of government controls. This means that Bitcoin is supposedly created for the purpose of addressing the flaws of fiat currency – inefficiency banking system, inflation and loose monetary policy.
As years passed, the idea of cryptocurrency as a form of digital currency began to gain traction with the wave of e-commerce activities taking root world-wide. Bitcoin rode on the wave and became very popular as many online stores began to accept payment using Bitcoin in exchange for goods and services.
In Singapore, as far as I know, one of the first few online stores that accepts payments using Bitcoin is BullionStar – a boutique bullion trader that sells physical gold and silver. Notwithstanding the popularity of Bitcoin in Singapore, it should be highlighted that virtual currencies per se were not regulated by the government.
Should you invest?
By now, you must be tempted to invest in Bitcoin, so what you are going to read may not be appealing. Instead of jumping the gun, you must hold your horses before throwing away your hard-earned monies.
In the world of investment, I have seen so many bubbles exploded right before my eyes. In fact, the community is littered with investors who were seduced by get-rich-quick investments and subsequently lost their fortunes. In 2000s, there were the dot com implosion in the stock market, then the US sub-prime crisis and then the gold buy-back fiascos.
Many Singaporeans had lost their pants when the prices of the exotic investment schemes collapsed following a period of rapid escalation. They thought that they had secretly found the solution to make it rich quick when in fact, they are just walking into a trap.
An example would be the gold buy-back scheme that was very notorious in Singapore back in 2013. Gold spot price had reached a record of almost USD1,900 per ounce. Investors were astonished by the surging gold price and many were fascinated by the unprecedented bull run of gold. Because of this fascination and the lack of understanding of gold, many Singaporeans fell prey to gold buy-back Ponzi schemes. You can read articles of gold bullion that I have shared previously below.
The worst mistake when it comes to investing is not understanding the risks. Many uneducated investors tend to invest in products or stocks which they do not understand at all. Subsequently, when they suffered losses, they either lodged police reports or complained that such financial products should be regulated by the government.
Frankly, sometimes it is very difficult to differentiate between a legitimate risky product vis-à-vis an outright scam. Many gold buy-back schemes are Ponzi scams in the sense that there are no underlying products or services being sold. The scammers merely transfer some of the monies taken from party A to party B as a form of “dividend payouts”. However, the same cannot be said for MiniBond, which is risky but not a Ponzi scam because these are merely complex structured products that even some financial advisors had difficulty understanding, let alone the man in the street.
Bitcoin certainly has the hallmark of an asset that is being grossly inflated. My worry is that many investors would be hurt when the bubble burst.
Education versus Enforcement
In Bitcoin, I see the same old bubble forming all over again. You can call me conservative or old-fashioned but I still believe that when some things are too good to be true, it probably is. There are reports of students and retrenched workers buying Bitcoins from machines in Singapore. For them, they are hoping to buy luck and strike it rich without working hard for money. What they don’t realize is that there is no such thing as short-cut when it comes to building wealth.
Many Singaporeans had lost their fortunes investing in MiniBond, gold buy-back and foreign properties. Do you want to be the next one?
Readers would argue that the government should intervene early and regulate Bitcoin before things get out of hand. But in my point of view, I don’t believe in more regulations or enforcement activities. When it comes to building wealth, education is key. When investors understand the concept of risk management and know how to mitigate risks in their investment portfolio, they would stand a higher chance of winning the game.
When you don’t know what you don’t know, it is almost impossible to learn from your failures. The result is that you often throw good money after bad.
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