Why bitcoin can explode like dynamite


When was Bitcoin created?

It looks like a scenario for a Marvel movie: an anonymous inventor developing an uncontrollable virtual currency. But bitcoin is not fiction. Half the world is under the spell of bitcoin - simply explained, a kind of computer code to which a certain value is attached.

Bitcoin is now twelve years old. On January 3, 2009, The Times headlined on its front page: "Chancellor of the Exchequer on the brink of second bank bailout." The article referred to the UK government's efforts to save the country's financial system from collapse. Europe was experiencing the heyday of the financial crisis. Satoshi Nakamoto, the mysterious inventor of bitcoin, incorporated that date and headline into the birth of his virtual currency. Those first 50 coins created are referred to today as the "Genesis Block". Right, a reference to the creation story.

In that first piece of computer code (called "block" in trendy jargon) the text "The Times 03 / Jan / 2009 Chancellor on green or second bailout for banks" was secretly hidden. That hidden text in the source code can actually be read as a digital battle cry. Bitcoin was born as a response to the global financial system. Monetary policy and politics are too closely intertwined, has been criticised. Central banks are controlling powers that can print money, create inflation, or control the entire interest rate policy.

Nakamoto came up with an alternative: a decentralised cryptocurrency, free from the control of governments and central banks. So Bitcoin is not under the control or guardianship of a central bank or country. There is simply no supervisory body.

The creator himself has no control over it either. Strange story by the way, that of Satoshi Nakamoto. Basically Nakamoto is a pseudonym for a person or maybe even a group of people who invented the whole mathematical system behind bitcoin. There is that one source text, Bitcoin: a Peer-to-Peer Electronic Cash System, which can be seen as a charter - or bible, to stay in mythology. A techno coin for the techno people.

No trace or sign of life has been heard of Nakamoto since 2011. He, or she, or they announced that they would no longer interfere with bitcoin. Nakamoto disappeared from the radar. Not so the bitcoin, which has only gained fame and even received countless copycats since then.

How about Bitcoin today?

Bitcoin is by no means the only crypto currency. Today there are an estimated 2,500 different cryptocurrencies, good for a "value" of about 225 billion euros. You've probably heard the rumours of Ethereum, a rival token, and Dogecoin, a digital joke coin. Meanwhile, there are also several exchanges to trade cryptocurrencies, such as Mt. Gox - now closed - and Coinbase, founded in 2012.

However, bitcoin is still by far the largest, with a market capitalisation of 150 billion euros. For the first time, a bitcoin is worth more than 50,000 dollars (41,600 euros). In one month, the currency rose by no less than 33 percent in value. This is also gradually having an impact on the real economy. Lender Mastercard has announced that it wants to allow payment in virtual currencies in its network. Paying with bitcoin can or will also be possible with Apple Pay, Amazon and Tesla. In that respect, Satoshi Nakamoto - whoever he may be - with his computer code can be counted among the greatest in computer history.

The price of Bitcoin

Yet there is also a dark shadow over this story. Due to the great anonymity that is embedded in the bitcoin, the currency was attractive from the outset to criminal figures and suspicious transactions. Bitcoin was established in 2009 with the promise of turning the global monetary system upside down. Twelve years have now passed and the digital currency still has a lousy reputation.

Then why does Elon Musk invest so much money into Bitcoin?

The big news for bitcoin in recent weeks was indeed Tesla's investment. The electric car pioneer bought $ 1.5 billion worth of bitcoins. Tesla announced this in its annual report that it filed with the American stock market watchdog, the Securities and Exchange Commission (SEC). If that's not a sign of confidence? Not so fast!

Elon Musk invested that amount with his cash reserves: money he does not immediately need for its day-to-day operations. To put this in perspective, Tesla has about $ 19 billion in cash reserves. The company's total stock market capitalisation (valuation) is currently hovering around $ 850 billion.

Why is this important? Immediately after the news became known through the financial news agency Bloomberg, the price of the bitcoin shot up. In less than 20 minutes, it rose from a value of $ 39,190 to a new high of $ 43,823, only to push through to $ 48,025 the following days. In barely twenty minutes, Elon Musk made a profit of over $ 177 million, assuming he bought at the current rate. If Musk bought his bitcoins in early January, he was already looking at a profit of just under 500 million dollars. And that figure is outdated every day, because the price continues to rise - for the time being. Great news for those who invested, but also risky: investing in bitcoin is no longer an investment or investment, it is a pure casino game. And in the case of Musk, completely risk-free: his initial investment of $ 1.5 billion represents a paltry 0.17 percent of Tesla's total market value.

The assumption that Tesla or Elon Musk gives bitcoin legitimacy is therefore incorrect. It's a game for him - a profitable game, though. The fact that the CEO of Tesla in the days before the announcement of his investment also recommended the currency as a future model, even smells of market manipulation.

Can you do the same as Elon Musk?

Technically, yes. Investing in bitcoin is not that difficult. Registration via a specialised online platform, such as Coinbase or Binance, is sufficient. After compulsory registration with your ID and bank account you can get started fairly quickly. Still, be careful not to get blinded by the prospect of quick wins. Transaction costs can amount to a few percent. There are also transaction costs if you sell. You have to be lucky along the way that you will not end up in the nets of scammers or hackers.

But the rebounded price is not the result of small investors who also want to risk something, but of speculators with deep (virtual) pockets. In the financial world of fast money, the bitcoin turned out to be the ideal Christmas gift for a poorly performing hedge fund manager. For example, SkyBridge Capital's Anthony Scaramucci dived into the coin after his funds posted one of the worst annual performances since 2008.

After all, the cryptocurrency's most outspoken advocates today are not millennials, but baby boomers and Generation Xers of the hedge fund world, taking big risks with large sums of money. Illustrious figures such as Stanley Druckenmiller or Paul Tudor Jones invest in bitcoin. A profit of several million dollars is a more fun story to tell shareholders than that their fund failed to deliver the promised performance. Hedge funds thrive on risky and speculative investments. Grabbing a piece of the bitcoin bubble is then part of that strategy. Risks and quick returns are part of it, as investors in such funds know and accept. "You win some, you lose some" is the mantra.

But Wall Street's rigid foundation, which also includes pension funds or sustainable investment funds, is much more wary. They use different values to insure their funds against inflation or interest rate risks in the long term. An average pension fund achieves a real annual return of 4.6 percent over the long term of 35 years. Speculators laugh at that. The average citizen who sees his pension protected as a result, thinks otherwise. And would prefer not to see his pension drown in the tsunami of a currency wave.

Are there limits to the bitcoin hype?

There are currently only 18 million bitcoins in "circulation". There will be a maximum of 20,999,849.9769, perhaps sometime in the distant future. This scarcity has been factored into the history of the virtual currency. This is important because, as every economist knows, scarcity drives the price up. The value of bitcoin is therefore partly dependent on the supply and demand game.

In that respect, bitcoin has already rightly been compared to the art market. We saw a good example of this a few weeks ago, when a painting by Sandro Botticelli sold for more than $ 92 million at an online auction organised by Sotheby's. The gem, entitled Young Man with a Medallion, painted in the 15th century, measures 58 centimeters by 39 centimeters. That is a lot of money, but of course the art market does not view it that way. The value is not in the size of the work, but in the scarcity. It hardly ever happens that a work by Botticelli comes onto the market. When that happens, the ratio disappears and speculation begins.

Bitcoin is the virtual Botticelli in this case. And yes, there is a danger in that. If a collector puts all of his Botticellis on the market tomorrow, prices will plunge, because the speculative aspect - scarcity - suddenly disappears.

It is very unlikely that numerous extra bitcoins will suddenly hit the market tomorrow on top of the 21 million "programmed". But what if another virtual currency soon becomes more attractive? Or what if the central banks or countries themselves launch their own controlled virtual currency? Then bitcoin becomes like a painting: a collector's item, with the value of what the collector is willing to donate. And the art market is the prototype of the fluctuations in value.

There is the difference with a "normal" investment: there is an underlying value. A share of a company reflects future earnings expectations. Of course there is also a speculative aspect in this. On the other hand, in a company there is always an underlying value. What is the underlying value of the bitcoin?

How big is the risk that bitcoin will turn out to be a giant bubble?

Robert Jarrow, a professor of economics at Cornell University, investigated the bubble behaviour of crypto coins through statistical tests. The foundation is the casino game: whoever continues to play will eventually lose their money to the house. The only reason to invest in bitcoin is to sell it to a bigger madman who will pay more for it. In the long run, it will implode, his analysis says. A further rise in value is attracting new speculators who fear missing out and put their real money into the virtual bitcoins.

It suggests that the first owners ("miners") own the vast majority of existing bitcoins. According to estimates, 4 percent of bitcoin owners would own about 98 percent of the existing coins. They become obscenely rich at the current rate, while - as in any pyramid scheme - the latter pay the price when the game ends. And to think that the whole system was set up to oppose the current monetary system, which they believe is neither democratic nor transparent.

Are there any other drawbacks?

North Korea has stolen $ 316 million worth of crypto coins in recent months in cyber attacks.. This is stated in a confidential report from the United Nations (UN). The communist state is doing this to fund its banned nuclear weapons program. That makes us think about the security of digital portfolios.

Take the test and check your spam mail. Bet you'll stumble across emails offering you a crypto wallet worth several thousand euros, just a few clicks away. Agree, your regular bank details will also be tested via the internet and challenged through phishing and other criminal activities. But there you have another point of contact if things go wrong: your bank. Who should you turn to if your digital portfolio has been looted or - suddenly - disappeared? It is a delicate place in the whole scheme: by wanting to escape any supervision or regulation, the currency has been outlawed.

Also as a payment instrument, bitcoin is far too inefficient to be of much use. Bitcoin can process less than ten transactions per second. A cup of coffee, a loaf of bread, that new dress? Forget it. And it consumes tons of energy at the same time. Mining bitcoins consumes as much energy as a medium-sized country. There you are, Elon Musk, with your green sustainable philosophy.

What would make bitcoin more sustainable?

As The Economist recently pointed out, an accommodation with regulators, more liquid trading and a restriction on criminal activity could give it wider appeal. But then it jeopardises its right to create itself. Regulatory backlash has also forced Facebook's digital currency, Libra, to downsize its early ambition. Yet it is not the case that there is no future story in cryptocurrency. Even the contrary.

The European Commission has even designed a beginning legislative framework. Not to recognise bitcoins as a valid means of payment or instrument, all previous lists are too great a gap for that. It is to use the technology behind crypto-assets. Those assets are described as "a digital representation of values ​​or rights that can be stored and traded electronically". The MiCA (Markets in Crypto-assets) directive is part of a package of legislative proposals designed to shape the digital transformation of the financial sector in Europe and ensure that innovative FinTech applications take their place. The regulation, listed in a long document, is very technical. The following must be remembered: legal certainty, innovation and fair competition, consumer and investor protection and financial stability as the common thread. All things that the bitcoin sect abhors.

Satoshi Nakamoto - whoever he or she may be - can be counted among the greatest in computer history with his computer code. But the Swedish chemist Alfred Nobel already discovered in 1866 that your invention can also be used for other purposes than initially intended. Bitcoin can explode like dynamite!

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