Jian Zhong (Ryan)
Is bitcoin a valuable investment or not?
Turpin states that Bitcoin is a digital, dispersed, part of anonymous money, without the support of the government or other legal entity, which means it relies on peer to peer network and encryption technology(Turpin, 2014). Bitcoin is widely discussed among the public over the past ten years because of its volatile price. Especially in November and December 2017, the intraday price of bitcoin increase dramatically from 3,000 dollars to 18,000 dollars. Therefore, many people buy bitcoin as an investment in order to earn money in a short term. Unfortunately, the intraday price of bitcoin drop significantly from 18,000 dollars to 6,800 dollars within 2 months. So whether bitcoin is a valuable investment is a discussable question. In this project, it would focus on that bitcoin is not a valuable investment, it will analyze the advantages and disadvantages of bitcoin and discuss some possible solutions to its problems.
2.Advantages of Bitcoin
2.1.Low transaction cost
The main advantage of bitcoin is low transaction cost. Bitcoin adopts a decentralized peer-to-peer network, where network users independently perform transaction confirmation without the need for a third-party clearing house. It sounds impossible to transfer 5 cents to other individual, but Bitcoin make this possible. It offers big opportunities to developing world where the bank systems are not complete. However, this advantage is apparent maybe ten years ago while electronic payment is popular in these years. Transaction could be make all over the world within an hour with a little fee. Meanwhile, the transaction of bitcoin needs about three to four days. Bitcoin do not have superiority in transaction cost any more.
Bitcoin is limited in supply and there is no inflation. The design of the Bitcoin system is somewhat modeled on gold, with an upper limit of 21 million, which can effectively prevent inflation caused by the central bank’s spamming. No inflation means that the price of productions would not increase which seems to be good to the public. However, according to Keynesianism, they believe that inflation can stimulate investment and increase employment, and economic prosperity and full employment could be ensured. Correspondingly, bitcoin as a deflation “currency” will inevitably be impossible to exercise currency function.
The most significant risk of bitcoin is value fluctuation. In June of 2011, the bitcoin’s value increased to 32 dollars while the price of it was 1 dollar in April 2011(Turpin,2014). Furthermore, its price increased dramatically to 18,000 dollars at peak and now in August 2018, its price drop to around 6,200 dollars. The reasons of fluctuation is bitcoin is not accepted by the public and many people buy bitcoin just for speculation.
3.1.1 Solution to value fluctuation
In order to solve bitcoin volatility, more liquidity and more participants are needed. There are a number of factors that would contribute to this happening. The creation of bitcoin capital market companies gives people reasons to hold onto their bitcoins rather than divesting at the very hint of a price dip. About 2 years ago a new group of companies started entering the market with investment products that accepted the intrinsic value of bitcoins. More participants in the market, means more bids and offers. Less gaps that encourage fearful behaviour. Over time as longevity in bitcoin will encourage confidence in the currency, a positive cycle will develop. In the same way fear can cause a negative cycle that snowballs into a crash, positivity will encourage more confidence.
The creation of bitcoin capital market companies is a possible way to solve bitcoin volatility. However, how to regulate these companies is another question. Furthermore, it is hard to establish these kinds of companies in some countries where Bitcoin is recognized as illegal investment. The other point is more participants, it needs time for people to deeply know bitcoin and have confidence in it. Therefore, it is a long term project, it cannot be addressed right now.
3.2.Trading platform vulnerability
The Bitcoin network is very robust, but the Bitcoin trading platform is very fragile. The trading platform is usually a website that is hacked or shut down by the competent authority. Since most Bitcoin users can only purchase Bitcoin in local currency through the Bitcoin platform. The exchange rate risk is not discussed for a while, and many bitcoin exchanges have suffered losses for users due to hacking. For example, in a report, the bitcoin trading platform Bitcoinica lost 18,547 bitcoins because of hacking. Recently, the European trading platform BIPS also lost 1,295 bitcoins due to security incidents.
3.2.1 Solutions to trading platform vulnerability
According to some specialist of cryptocurrency?there are three useful ways to address this problem. The first one is before you open up an account on Coinbase or other exchanges, setting up an unique email that you are going to use for that account. The second one is making sure to set a really hard and long password, and the user is the only one to access it from a piece of paper that the user control. The last one is not to keep all your cryptocurrency investments in one place. Diversify among exchanges. It is impossible that the users get hacked at the same time through all of them. Especially if you have different emails and passwords for each.
These solutions seems to be useful in some way. The true is that many investors actually do the first two suggestions and it does not help. A long and hard password is no longer a problem to the hackers in these days. In terms of the third one, diversifying among exchanges could decrease the rate of being hacking which can be efficient to prevent from being hacking.
3.3. Not accepted by the public
The public does not understand the principles and the resistance of traditional financial practitioners. Active netizens understand the principles of p2p networks and know that Bitcoin cannot be manipulated and controlled. But the public does not understand that many people can’t even distinguish the difference between Bitcoin and Q. “No issuer” is the advantage of Bitcoin, but in the eyes of traditional financial practitioners, the “no issuer” currency is worthless.
Bitcoin as a cryptocurrency is a new currency that is not familiar to the public. So the most effective way is to increase the publicity of bitcoin. It would take times, but it would success in the end.
Even though the public would probably accept Bitcoin in the end, how long would it take is a problem. Furthermore, time do not work for financial practitioners, because according to financial knowledge?bitcoin is not a currency and it has no value. It would not change in the future. According to Fahad(2018), he examine the price deviation of Bitcoin and demonstrate that market determined price trade at an average premium of 44%, which means that the price of Bitcoin is inefficiency.
Based on the analysis of Bitcoin, it is not a valuable investment. In a short term, Bitcoin seems to have great speculative opportunities. Nontheless, the price of it fluctuate without any reasons, the price can not be speculated, which means the investors would take great risks to invest on it. In the meantime, Bitcoin do not have that much advantages any more in terms of low cost and limited supply. Therefore, investors should invest other investments but not Bitcoin.