It’s the phenomenon that has captured everyone’s attention. A year ago one Bitcoin was worth around USD900, but now it is trading at USD11,347 – after reaching an eye watering USD19,206 in December. It is therefore inevitable that everyone is asking the same question – Should I buy Bitcoin?
The Blockchain is poised to change the Internet, so should I buy Bitcoin?
As I explained in a previous post blockchain is a revolutionary technology that has the potential to change the Internet, democratise data and enable peer-to-peer trustless transactions.
Financial institutions such as banks have launched proof of concept (PoC) projects and the results are in. The blockchain makes it possible to transfer money much faster than is possible today and at a much lower cost. Clearly blockchain is poised to transform the financial services sector.
However it is not just banks and financial service providers that are testing the technology. Applications are being explored in real estate, ownership registries and even ticketing. The days of ticket touts charging exorbitant markups on hot events will soon be over.
There is a lot to be said for the blockchain. However does this automatically mean that Bitcoin will continue increasing in price? Should we all sell our houses, buy Bitcoin and wait to make a killing?
Is Bitcoin as good as Blockchain?
So blockchain is great. Transactions can be concluded fast and the direct nature of the technology cuts out intermediaries, keeping costs low. Does this also apply to Bitcoin?
The initial hype was that Bitcoin would make it possible for users to close transactions faster and at a much lower cost than was previously possible. However the reality has fallen far short of expectations, especially in the last few months when Bitcoin-mania hit the airwaves.
Bitcoin transactions are slow and expensive.
As I write this post there are over 54,000 unconfirmed Bitcoin transactions stuck in a queue waiting to be verified by miners. This queue is called the Bitcoin mempool and the result is that it is taking days for a transaction to be finalised.
When the price of Bitcoin grew exponentially, lots more people started buying and selling the cryptocurrency. The blockchain network that underlies Bitcoin could not scale to deal with the surge and could only process around 3 to 7 transactions per second. The result was a dramatic increase in the time required to complete a Bitcoin transaction and also in the associated transaction fees.
Bitcoin Transaction Fees are Expensive
Miners who verify the transactions and add the data to a block are in high demand. Now we all know how supply and demand works. If there is more demand than supply, prices will go up, and that is exactly what happened. Mining fees have become an auction of sorts. Transaction fees that were in the USD2 bracket a few weeks earlier increased to USD20 in December, pricing out low value transactions.
The conclusion is that Bitcoin is NOT delivering on the blockchain promise of rapid transactions and lower fees.
Can I use Bitcoin to buy stuff?
Bitcoin is touted as the cryptocurrency that will take over from FIAT (ie traditional) currencies. There was a time when people could buy a pizza using Bitcoin. Is this now possible?
Obviously one of the key features of a currency is that one should be able to buy things with it. It is pointless to hoard a mountain of money if this cannot be used to buy stuff. In 2016 the signs were that Bitcoin was gaining traction and going mainstream. News that Steam (a popular gaming platform used by more than 89 million gamers in 237 countries to play more than 9,000 different games ) had started accepting Bitcoin payments in April 2016 was heralded as proof that the age of the cryptocurrency had arrived.
However is this still the case? A couple of months ago Valve, the company that owns Steam, announced that it was no longer accepting Bitcoin . They cited the instability of the cryptocurrency and the excessive transaction delays and fees as the reason for the decision.
No Longer Popular with Crooks
It’s not just legitimate players that are abandoning Bitcoin. The bad guys are bailing on it too.
Bitcoin used to be the cryptocurrency of choice for illicit transactions on the dark web and for the payment of ransoms to ransomware operators. However this is no longer the case. Rob Wainwright, the executive director of Europol, recently commented that criminals were moving away from Bitcoin. The instability in pricing and the delay in transaction completion is a problem for these shady operators. When collecting a ransom a crook wants to collect and run as fast as possible. Waiting for days for the transaction to come through because the Bitcoin network is overloaded is clearly not an option.
So when you answer the question “Should I buy Bitcoin?”, consider this: What’s the point of being a Bitcoin millionaire if you cannot actually buy anything with your Bitcoin?
Can Bitcoin be replaced?
Bitcoin is the first cryptocurrency and so far the most successful. However this does not mean that it is irreplaceable. In fact new cryptocurrencies with better functionalities are already available. One example is Ether, the cryptocurrency of the Ethereum blockchain network.
Ethereum takes blockchain one step further than the Bitcoin network does, enabling Smart Contracts. These are seen to be a fundamental building block to take blockchain applications to the next level, making it possible for companies and consumers to commit to automated trustless transactions.
This becomes very interesting when one imagines the world of blockchain intersecting with the Internet of Things (IoT). Let’s imagine a hypothetical scenario. I run out of milk. My fridge, which is connected to the IoT will then send an automated order to my online grocery store of choice, automatically triggering a payment based on a smart contract. When I get home in the evening a drone drops off the milk. This might sound like the stuff of science fiction but the technology actually exists and is being tested.
So when I ask myself “Should I buy Bitcoin?” I have to wonder if it will actually be Bitcoin that will win the battle of the cryptocurrencies, seeing as other more recent cryptos offer enhanced functionalities.
Why has the price of Bitcoin surged?
There has been a lot of debate as to what prompted the surge in Bitcoin price last December. There are signs of a “pump and dump” strategy adopted by some players who wanted to manipulate the Bitcoin exchanges in order to make a quick buck.
Pump and Dump works in a simple manner. A group of people collude to buy as much of a cyrptocurrency as possible, leading to a surge in price. They then generate a buzz around the coin, hoping that people will smell an opportunity and join the buying frenzy, leading to further price increases- at which point they immediately sell their coins and make a quick profit. When one looks at the surge in price in December and the dramatic drop in Bitcoin prices since then, it is difficult not to think that something of the sort happened.
At the heart of the pump and dump strategy is greed and people’s tendency to follow the herd. When everyone is screaming that Bitcoin is the next big thing and that it is the fastest way to become a millionaire, it is difficult to stand on the sidelines and not buy in. This is exactly how Ponzi schemes work. However it is important to remember – if it sounds too good to be true, it probably is not.
News recently emerged that the US Commodity Futures Trading Commission issued subpoenas to the Bitfinex exchange and Tether as part of an investigation into possible price manipulation of Bitcoin.
Do not ignore the writing on the wall.
So should I buy Bitcoin?
I am not a gambler. I believe in investing my money and aiming for long term wealth generation. Making a “quick buck” is not interesting to me. The Bitcoin mania that swept the world over the last two months follows the A, B, C of speculative bubbles and it is bound to burst spectactularly.
Governments and regulators worldwide are casting a beady eye in Bitcoin’s direction and there will undoubtedly be a crackdown on Bitcoin and other cryptocurrencies.
So NO, I will not waste my money on Bitcoin, and neither should you.