Not betting on Bitcoin

19-04-2021 03:15 PM

By Yusuf Mansur

Many in Jordan, especially the young and the want-to-be-rich-now see a lot of merit in investing in cryptocurrencies, the most famous of which is the Bitcoin. However, it is important to understand the risks associated with such an investment (if one can call it that).

Satoshi Nakumoto, (which is a pseudonym; to date, no one knows with certainty his/her true identity), was the person(s) who wrote the cryptocurrency code in 2007 and registered a website in 2008 in which he described a cryptocurrency called Bitcoin, an electronic cash system from peer-to-peer without an intermediary such as a central bank. The cryptocoin is a digital currency that depends on what he called the blockchain. In mid-2010, Satoshi launched the crypto coin. Nakumoto announced when he launched the Bitcoin that the number of Bitcoins in existence will not exceed a maximum of 21 million units (almost 19 million have been produced so far).

When the currency came into existence in 2010, its price was $0.008 (less than one US cent), and within a year jumped to 8 cents. It then rose in the first third of 2011 to 67 cents, and reached $327 at the end of 2015 as about 100,000 people and institutions around the world accepted it in trading. It was recognised by Japan and South Africa in 2016. Furthermore, because of the secrecy involved in owning the Bitcoin and other cryptocurrencies, they attracted criminal elements and activities such as money laundering, financing terrorism and tax evasion.

Bitcoin began to spread widely in 2017 as more institutions accepted it, and its price continued to rise while exhibiting phenomenal fluctuation rates. Let’s view some historical prices. The Bitcoin price reached $20,000 in December 12, 2017, and fell five days later to $13,800. It fell again in February 2018 to $6200, and dropped yet again by another 50 per cent in December 2018 to reach $3,300 dollars. But wait, it rose, in July 2020, threefold to $11,000 and continued to rise to $28,000 by December 2020. A month later, in the first week of January 2021, the price of Bitcoin became $34,800; only to rise again, within five days, to $41,973, and fall three day thereafter to $33,400. When Elon Musk, the founder of Tesla, announced on February 8 that Tesla invested $1.5 billion in Bitcoin, the price shot up within three days to $48,879. At the time of writing, the price of a Bitcoin is $ $62,240 (some crypto pundits expect its price to reach $100,000). Imagine the fortunes made and lost in a purely speculative trading of the cryptocurrency, which may be a 12 year bubble.

It is possible to produce (mine) this currency by solving algorithms on high capacity computers, but the cost of mining it becomes higher as more coins are mined. Currently, the energy cost of mining one Bitcoin is equivalent to the energy required to light a small city for one day. Also, Bitcoin is not the only cryptocurrency; there are more than 4,000 cryptocurrencies with different names and prices.

It has become well known, and should be extremely clear by now, that the Bitcoin as a currency whose value is based entirely on speculation; that is, its value is decided by a purely speculative market. Furthermore, as shown above, its fluctuations are frequent and voluminous, which means that the price may explode endlessly or collapse to zero in moments. Also, its price does not have a single equilibrium point, but rather there is an infinite number of equilibria that are not based on foundations; that is, traditional economic indicators such as unemployment figures, interest rates, inflation, confidence in the economy, growth rates, investment flows and so on. So the price falls and rises infinitely. While there are also an infinite number of equilibrium points for the currencies in circulation, the traditional currency rates depend to some extent on the basic principles of trading, which enable traders to make educated guesses or predictions.

Competition to cryptocurrencies will most likely come from countries and multinationals announcing their own digital currencies (which use a blockchain but provide some backing for the currency) such as China’s digital Yuan. With central banks’ backed digital currencies that use blockchains, cryptocurrencies may be in for a clear and imminent challenge.

From a legal perspective, Bitcoin is a currency that is not recognised in Jordan and cannot be officially traded according to the instructions of the Central Bank of Jordan. However, possessing it is not punishable by law, and there are those who bought it and deal with it in Jordan.

Since the currency is purely speculative, buying and selling Bitcoins and other cryptocurrencies is akin to gambling on a roulette or blackjack table. You place your money on the table, and pray for the best. Yes, you can win a lot, and you can lose it all in seconds. Based on this, if you want to bet on Bitcoins, please make sure you are betting with money that you can afford to lose, otherwise, stay away, at least for now.

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