THE value of Bitcoin, one of the most popular and well-known digital currencies on the market, rose sharply recently when Elon Musk, one of the richest men in the world, decided to invest in it by buying USD1.5 billion worth of it.
Currently the value of one Bitcoin is equivalent to RM258,476.64. In February 2011, its value was equivalent to only RM4.00. In other words, if you had invested RM400 in Bitcoin in February 2011, your current investment would be worth RM25.84 million today. Without doubt that would have been a very profitable investment.
Yet you don’t have to feel sorry for not investing in Bitcoin in 2011 because the movement of Bitcoin has always been very volatile and therefore many parties were too scared or anxious to invest in it during that time including Elon Musk himself.
Even now many financial experts have conflicting opinions on the future value of Bitcoin, with some predicting its value will continue to increase in the future and others saying that one day Bitcoin will not have any value whatsoever.
Some experts on Bitcoin argue that the high interest in Bitcoin now is actually likely to be a temporary trend, akin to the investment mania in tulip flowers in Europe in 1636. In that particular case, as a result of strong demand, tulip prices soared. But it was only for a short while, before plummeting in February 1637 causing many investors to suffer huge financial losses.
The value of Bitcoin is very high right now because there is a high interest and demand for Bitcoin. One contributing factor is the concern of many parties over the value of the major fiat currencies such as the Dollar, the Euro and Pound Sterling, arising from the recent drastic increase in their supplies when governments around the world added huge amount of debts to solve economic problems caused by the Covid pandemic. Some predict the occurrence of hyperinflation, which may cause people to switch from fiat currency to Bitcoin to conduct transactions. At the moment it can already be used to buy a Tesla car. In the future maybe more sellers would be willing to accept Bitcoin as a substitute for fiat currencies.
But so far, the number of transactions using Bitcoin is very small compared to fiat currencies. The main reason is that many countries have strict rules regarding the currency that can be used in their respective countries. For example, Malaysian law, namely the Malaysia Money Act of 1975, only recognizes the Ringgit as legal tender. Therefore, all transactions involving the government (such as paying taxes) can only be done using Ringgit.
The possibility that Bitcoin will not have any value in the future exists simply because Bitcoin does not actually exist physically. It differs from other forms of investment such as land, house or gold because land, house or gold are assets that are capable of benefiting the investors directly. Gold for example can be used to make jewellery such as necklaces or rings, houses can be used as shelters, while land can be used for farming. On the other hand, Bitcoin cannot directly benefit the investor since, as in the case of fiat currency, it can only be used as a medium for trading transactions.
The difference between Bitcoin and fiat currencies is that new Bitcoins can only be created through an electronic verification process of previous transactions using Bitcoin. When a person is able to perform this electronic verification using computer equipment, he will be rewarded with one Bitcoin in his account, which is also in the form of an electronic entry.
In the case of fiat currencies, more than 95 percent of new currencies are created by commercial banks when they lend to customers. The rest of the fiat currency is created by central banks, such as Bank Negara Malaysia in the case of the Ringgit and the Federal Reserve Bank in the case of the US Dollar.
The process of creating fiat currency by commercial banks is tightly controlled by central banks from the beginning of its creation and while it is used in transactions when money moves from accounts kept in banks. Therefore, central banks have detailed information of fiat currency transactions.
In the case of Bitcoin, its creation process cannot be controlled by any central bank as it is not created by the banking industry. Transactions that use Bitcoin also do not need to involve bank accounts. Bitcoin also differs from fiat money in that the process of its creation does not require the creation of debt, as is the case with fiat currency. Therefore, any addition to the amount of Bitcoin is not followed by an increase in the amount of debt. This is the reason why supporters of Bitcoin claim that it can help protect society from the grip of the banking industry as well as protect the poor and weak from being oppressed by the rich.
But so far it has not been proven that Bitcoin is capable of playing that role. The main reason is that almost all countries maintain a financial system where the banks are empowered to be a currency issuer while providing debts to their customers. Therefore, as long as people are interested to borrow money from banks, fiat money will be the currency that remains dominant.
Moreover, if people increase their debts to banks, the amount of fiat currency will also increase. And since all these debts also have to be repaid in the form of fiat currency, this will also mean that members of the community are actually forcing themselves to continue to use fiat currency.
In fact, some are so excited at the prospect of making money from Bitcoin, they are willing to go into debt with the bank to buy Bitcoin as a form of investment, in the hope that the value of Bitcoin will continue to increase. If many people are involved in this activity, this will result in an increase in the amount of debts to banks (in addition to increasing their profits), and at the same time strengthen the banking industry and the existing currency system.
In summary, so far Bitcoin is only an investment asset which is an alternative to gold, houses, land, stocks and other forms of investment assets. The recent rise in Bitcoin price is due to the sharp rise in investor interest and a result of the opinion of some economists on the possibility of inflation in many countries which will reduce the value of some fiat currencies.
However, since people are still interested in using banking services, the fiat currency financial system will continue to remain relevant and important. Moreover, since some are willing to go into debt to invest in Bitcoin, this means that Bitcoin has actually directly contributed to the strengthening of the banking system and the fiat money system.
The founders of Bitcoin may have intended to introduce an alternative currency that could contribute to efforts to eliminate an unfair financial system where the rich get richer and the poor and weak become weaker and where the income gap between them continues to widen. However, since societal values do not see debt and banks as being problematic, the existing financial system will not change and will even become stronger due to the existence of Bitcoin.
* Prof Dr Mohd Nazari Ismail is a lecturer at the Faculty of Business and Accounting, University of Malaya
** The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the position of Astro AWANI.
Prof Dr Mohd Nazari Ismail
Mon Apr 19 2021
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