Bitcoin triggered a great deal of enthusiasm a few years ago, but the market soon cooled off. Although interest in bitcoin surged again last year, there had been great ups and downs like riding on a roller-coaster. Is bitcoin a short-lived bubble or an alternative tool that will lay golden eggs for investors?
Wincent Hung: Bitcoin has potential and prospects
Trading or investing in bitcoin is still a new concept for most investors, and it is important to understand how bitcoin works and the underlying technology before making any investment decision.
Blockchain technology for transaction validation
Wincent Hung, Director of Genesis Block, a cryptocurrency over-the-counter trading center, described bitcoin this way: “Bitcoin is a trading medium for transaction, just like any other currency.” At present, every currency in the world is issued by the government-designated agencies or banks of a country, but bitcoin does not require any state agencies or banks. What it needs is only a monetary system maintained by data processors, commonly known as “miners”, through rigorous mathematical calculations.
The blockchain technology is used to validate each bitcoin transaction and store it permanently, so the blockchain can be viewed as a ledger in which bitcoin transactions are recorded. “Each transaction is verified by ‘miners’ through timestamps and locked with a password to ensure that the data will not be tampered with,” Hung added.
Save time and avoid exchange rate risk
Hung pointed out that as an electronic currency, bitcoin has many merits that are difficult for traditional currencies to replace. “Transacting in bitcoin can greatly reduce the time required. For instance, a bank may need two to three days to process a transaction for sending money to the US, but with bitcoin, the transaction can be completed in 10 minutes.”
There is no exchange rate difference in bitcoin transactions, and since the transactions are not handled by banks, there will also be no bank charges. Users can check every transaction via the internet anytime, anywhere. However, Hung stressed that network security needs special attention when using bitcoin for transactions, because it is difficult to check and recover losses once someone else gets the password and intrudes into the account. “As no technical loophole has emerged since bitcoin’s launch, users do not have to worry about it being hacked, so managing their own Internet privacy is more important.”
Governments wary due to absence of regulatory system
Hung pointed out that the major banks’ stance and government policies have direct impact on bitcoin prices. “In the past year or so, the new policies introduced by various governments and major banks were favorable sometimes and unfavorable at other times, sending bitcoin prices on roller-coaster rides. This is mainly because governments are wary of bitcoin’s rapid development and rising prices in the past two years, but in the absence of a systematic approach for effective electronic cryptocurrency regulation, they tried to prohibit it, thus causing the price fluctuations.” Bitcoin’s current estimated total value of about US$100 billion is less than the market value of some listed giant companies, but government policies tend to affect its price movements and cause price fluctuations.
Hung suggested that those who are interested in investing in bitcoin should first understand its workings and development. “Just like investing in a stock, they need to understand its operating conditions and prospects before knowing how to deal with the sudden fluctuations.”
Tie in with traditional financial system
Although many countries are currently wary of bitcoin, Hung is still optimistic and full of confidence about its prospects. “I think bitcoin is set to become a major currency in the future. In addition to its merits mentioned above, bitcoin can in fact complement the traditional financial system to speed up international fund transfer transactions and reduce transaction costs.” In the future, should another global financial crisis hit, investors will lose confidence in the traditional financial system, and Hung believes that like gold, bitcoin can act as a safe haven against risks; the 2008 financial crisis was precisely the reason why bitcoin emerged.
Nevertheless, bitcoin is still a new investment tool for most investors. Hung hopes to enable the general public to understand the workings and technology of bitcoin and other electronic currencies through investor education. “Increasingly more companies globally are accepting transactions in bitcoin, but Hong Kong has obviously failed to catch up. As an international financial center, it should always keep pace with the times.”
Kenny Wen: Understand the underlying workings before investing in bitcoin
Bitcoin is definitely on the list of hottest investment topics of late. The world-renowned cryptocurrency climbed to a record high of US$20,000 earlier in the year, then dropped to US$6,000 and recently returned to nearly US$10,000. The volatility is alarmingly high. Some market participants described bitcoin as an “asset bubble” or even a “scam”; but there are also enthusiasts who regard it as an alternative investment tool that will lay golden eggs. So, views on bitcoin are mixed.
Kenny Wen, Wealth Management Strategist at Everbright Sun Hung Kai, pointed out that the positioning of bitcoin is rather vague. It has a number of currency characteristics; for example, it can be used for consumption, shopping and donations in countries, companies and charities that recognize its legal status, or it can even be used for illegal transactions. However, compared with traditional currencies, bitcoin’s value is extremely unstable as its ups and downs are driven by market sentiment and the supply and demand arising from it, and is more so than high-risk derivatives.
Difficult to predict due to dependency on market sentiment
Wen believes that the bitcoin myth stemmed from favourable conditions. It started during the 2008 financial crisis when large blue chips in mature markets plummeted 70% to 80%, dealing a heavy blow to investor confidence in traditional investment vehicles. Since then, many countries have introduced quantitative easing to save the economy, leading to the devaluation of many traditional currencies. All these gave more space for the existence of alternative investment products such as electronic money. Bitcoin, which came into existence in 2009, is characterised as having features of a “decentralized” currency with “limited circulation”, which attract a new generation of investors who are keen on innovative investment products.
“From rising to falling, bitcoin’s movements depend entirely on market sentiment and the supply and demand arising from it. Common market fundamentals cannot be applied to it. Therefore, it is difficult for investment experts in different fields to make reasonable analyses and provide professional advice. As a result, investment risks are very high.” Wen further cited several factors that caused bitcoin to skyrocket or plunge: last year, for example, the launch of bitcoin futures on the Chicago Mercantile Exchange and Chicago Board Options Exchange immediately started an upsurge; earlier this year, the Indian Government said it would move to stamp out use of cryptocurrencies such as bitcoin, and coupled with suspected price manipulations by cryptocurrency exchanges, bitcoin prices soon plummeted, triggering panic selling by investors. This shows that bitcoin is directly influenced by market sentiment and remarks made by authoritative figures. Driven by speculators who hold a large amount of the cryptocurrency, bitcoin prices may surge or nose-dive at any moment without any rational factors, so it is not suitable for general investors with limited risk tolerance.
Long-term investors and short-term speculators should act within their means
Wen suggested that for investors with extensive experience and abundant capital, even if they have the confidence to handle the strong volatility of bitcoin, they should avoid investing too much money and allocate only a small portion of their assets to it. This is to ensure that they will not be affected financially should they suffer complete losses from the investment. “Investors should keep in mind that bitcoin is a very risky and speculative investment. As in the often-mentioned financial pyramid, the closer to the top of the pyramid, the riskier is the investment product, and bitcoin is like adding another layer to the pyramid, the risk of which is very high.”
As to how to invest in bitcoin, there are now two common ways. One is to buy or sell on the market at the spot price. The other is to buy a machine for bitcoin mining or rent out mining machines for returns. Wen pointed out that the difference between the two lies in how confident investors are in bitcoin. “Those who are optimistic about the medium- to long-term development of bitcoin will prefer to invest in a mining machine for slower returns and cover expenses such as those on electricity with long-term earnings. On the other hand, short-term speculators will buy low and then sell high on the spot bitcoin market, but due to bitcoin’s high volatility and rapid movements market conditions can change considerably within the day. As every second counts, they have to stay alert at all times.”
There is space and demand for cryptocurrency
Looking ahead at the future of bitcoin and the cryptocurrency market, Wen believes the sudden bitcoin upsurge shows that the market has certain demand for related investment products. Some investors hope for investment options that are more transparent and “decentralised” beyond the traditional investment products. However, similar cryptocurrencies such as Ether, Ripple and Litecoin are not yet fully developed at this stage. Despite the rapid development of financial technology, the financial markets in various countries have failed to fully support it with legislation and regulations. As a result, grey areas exist, increasing the risks to investors.
Nevertheless, Wen added that as long as bitcoin is still recognized and accepted by some countries, industries and enterprises, there is some room for its existence. Coupled with the fact that the playing field is still dominated by speculative actions of some highly capitalised people and there is still no widespread involvement among the people for the time being, the bubble should not burst in the near term. However, he reminded investors of keeping in mind that as bitcoin is a very risky speculative product, they should act within their means and avoid following the crowds in order to prevent unnecessary losses.
