My experiment with Bitcoin and musings on its future: From negative to neutral, even a little bit positive.

Despite my objections to Bitcoin and my negative views about it (see this and this), I think Singapore is right to understand it properly.

Singapore keeps pushing ahead while the West stagnates: there is a culture of deep innovation in its public sector (which is essentially private). Singapore does not ignore new technologies. It tries to understand them and take advantage where possible.

Following this lead from Singapore, I’ve also put a tiny bit of money into bitcoin and one other alternative currencies, so I can understand what is going on. I also managed to read up quite extensively about these alternative currencies. This is money well spent to get a better understanding of cryptocurrencies.

My concerns are largely regulatory, and many of these concerns still remain. But I find that regulators have had a very long time and done NOTHING about it. Therefore, this has now grown too big to deal with. It is a REAL thing, that needs to be given real consideration.

LESSONS TO DATE:
I’ve purchased through a Hong Kong based exchange. There was very diligent validation of identity by the exchange. That should help lower money laundering risk. I had transferred AUD through my bank, so this is a fully recorded transaction.
BUT I understand that customers of the exchange can plunk in their bitcoins directly into the exchange (i.e.not through banks). These bitcoins, being totally anonymous, could have been purchased/ mined in any number of ways unrelated to the regulatory system – including through drug/corrupt money.

My issue is: how can any regulator even possibly deal with this issue? Maybe that’s why they are sitting on the sidelines, confused about what they can do.

The exchange can be regulated and can check ID, but how can anyone identify “black-money” bitcoins?

I can report the following:

1) There is THICK trading – very active trading of bitcoins in the Hong Kong based exchange. Spreads are very small, as a result. Trading is instantaneous. 

2) There is very THIN trading in alternative currencies: only a few of them are convertible into dollars, only very small amounts are traded, with very wide margins. 

3) Most alternative currencies that are traded (very few are) have been declining in value over the past many months.

4) Bitcoin volatility has dramatically reduced over the past few months.

5) Bitcoin market capitalisation is around $8 billion compared with the nearest competitor Litecoin at $200 million. 

This indicates:

- Just like Facebook displaced Myspace and Okrut comprehensively and totally, so also the “eyeball” factor, the thick trading factor, and the assurance that the black money and corrupt industry of the world will always act as a “base” for the bitcoin market, have meant that alternative currencies are being wiped out, even as Bitcoin is now becoming more of a “store of value” and more likely to be used/traded across the world. Alternative currencies are fighting a losing battle.

- There is not much to distinguish various crypto-currencies, some minor technical matters notwithstanding. As commodities, it is now merely a matter of consumer preference (thickness of markets) that will dictate which one “wins”.

- Regulators have had plenty of time to resolve the money-laundering and ‘black-money’ issue that plagues Bitcoin, but they simply CAN’T. Therefore this business of bitcoins will flourish regardless of what regualtors do.

- Bitcoin is currently behaving more like an asset (e.g. gold) than currency. I don’t have a digital wallet yet and don’t see the need to create one. That will require me to hold bitcoins at my own risk and I could lose them if I lost my digital wallet. Much better to store them in a digital exchange.

- It is possible that as bitcoin is seen by more people as a store of value (and potentially, an asset that increases in value), more people could buy this thing, which would lead to a self-fulfilling prediction. THE MORE THE PEOPLE THAT BUY BITCOIN THE MORE THAT WILL BUY IT AND THE MORE ITS VALUE WILL INCREASE.

- Bitcoin is likely to increasingly become part of people’s portfolio.

- The moment any two or three governments “validate” bitcoin (through regulatory means), its “desirability” will radically increase, thereby causing a RUSH TO BUY, which will dramatically increase its value, and therefore desirability.

- Regulators are likely to realise that they best way to regulate Bitcoin is to work out agreements with Bitcoin exchanges to share data of their citizens. E.g. the Hong Kong exchange could provide data to Australia about my purchase – and particularly when I sell Bitcoin.

- Unlike paper money, Bitcoin – once it has reached ‘critical mass’ – is unlikely to lead to a ‘run on the bank’ – i.e. panic sale.

- People are more likely to want to be paid in Bitcoin once it has become established as an alternative currency-asset (it has both properties).

CONCLUSION
If regulators aren’t able to “ping” Bitcoin rather quickly now (they’ve already taken too long to review it), then I expect Bitcoin to become a very disruptive technology. Its impacts could be very far reaching. Completely unprecedented.

Do I recommend BitCoin now? No, I’d still recommend great caution, just in case a big regulator somewhere manages to find a way to shut it down.

But the risk of any regulatory closure is fast diminishing. At best, it is likely to be regulated and therefore “regularised”.

Once that happens, Bitcoin will shoot up in value to astronomical levels.

Bitcoin is potentially the reverse of a Ponzi game, as it relies on (a) limited issue of coins and (b) complete absence of regulatory disruption. Therefore, once enough people “believe” in it, it only has an upside, not downside.