Opinion: Bitcoin or Bit-con? Don't believe the hype
Guest commentary by Andy Mok
There has been much hype about Bitcoin and other so-called cryptocurrencies such as Ethereum, Litecoin, etc. This hype has mainly manifested itself as an investment mania that recalls legendary bubbles like those described by the Scottish journalist Charles Mackay in his book Extraordinary Popular Delusion and the Madness of Crowds. Recent actions by the Chinese government show that it recognized the risks such delusions present to both individuals as well as the financial system and acted preemptively to mitigate these risks.
What exactly are cryptocurrencies like Bitcoin?
What these cryptocurrencies all have in common, besides being based on the blockchain, is that they are an amalgamation of three separate functions (namely, a payment system, a medium of exchange and a commodity) bundled together into a single offering.
The value of Bitcoin as a superior alternative to payment systems in China whether traditional ones ranging from credit/debit cards to SWIFT and other financial institution-to-financial institution systems or newer ones such as Alipay or WeChat Wallet is doubtful.
Similarly, beyond a few isolated and narrow scenarios, cryptocurrencies offer little advantage over existing mediums of exchange such as the RMB, US dollar or the Euro.
It is Bitcoin’s role as a commodity that has generated the most financial activity as well as government attention. What exactly is a commodity though? Simply put, commodities are things of value, of uniform quality, produced in large quantities by many different producers; the items from each different producer being considered equivalent. Another key characteristic of a commodity is that its prices are determined by the market as a whole.
However, what differentiates cryptocurrencies from other commodities is that cryptocurrencies lack any intrinsic value. By contrast, physical commodities such as oil, natural gas, soybean, wheat, aluminum, gold, etc. all have some inherent value in that they are used to satisfy a real-world need. Similarly, financial commodities such as foreign exchange, interest rate futures, etc. exist to hedge against financial risks or otherwise manage exposures to changes in exchange rates or interest rates.
The ability to speculate or bet on the rise and fall in prices of these commodities exists as a means to facilitate and support the above-mentioned primary functions.
On the other hand, cryptocurrencies exist solely as a means to speculate. In this way, they are no different than sports wagering or other forms of gambling.
The outlook for Bitcoin
While the returns from investing in (speculating in?) Bitcoin have been impressive, the actual trading volume has been modest. For example, according to the Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity conducted by the Bank of International Settlements foreign exchange trading averaged 5.1 trillion US dollars per day. While cryptocurrencies have experience large percentage growth, trading volume for all cryptocurrencies only totaled 11.5 billion US dollars as of mid-September this year.
Also, the number of traders of cryptocurrencies is pretty small. According to Coindesk, in 2016 there were globally close to 14 million cryptocurrency wallets in use. It is generally accepted that most users own multiple wallets. Based on this data, Cambridge University estimates that 3 million users actively use cryptocurrencies.
While the hype machine surrounding Bitcoin has been extraordinarily effective, in reality, cryptocurrencies are more of a Frankensteinish amalgamation of functions of dubious value and viability. As such, the cryptocurrencies may continue to exist but only as a niche form of gambling and speculation.
(Andy Mok is Managing Director of Red Pagoda Resource. The article reflects the author's opinion, and not necessarily the views of CGTN.)