BitCoin – The Most Disastrous Asset Class of 21st Century

November 30, 2017 Sowmay 15

bitcoin

If you’re a bitcoin lover, you should stop reading this article. It’s fully pessimistic towards current trend of Bitcoin. However, people interested in its underlying technology of blockchain are most welcome.

“Bitcoin” is at its high on Google Search as per the data compiled by Google Trends.

I was totally bashed up by the recent irrational hike in Bitcoin Prices and the wide market bullish sentiment towards this virtual currency.

I can’t resist myself from quoting an awesome case study of Infosys Tech Ltd written in Stocks To Riches (Authored by Late Parag Parikh).

In 2000, I had done a study on the behaviour of the market valuation of the fundamentals of Infosys Technologies Limited, the leader in the software sector and a favourite of all the investors. It is a very good company and had been growing at over 100% at that time.

The stock price shot up from around Rs. 2,000 (Rs. 10 paid up) in January 1999 to around Rs. 12,000 (Rs. 5 paid up adjusted for split) in March 2000. Nothing spectacular had happened to the company to justify such a steep increase. But by the end of September 2000, the stock was down to Rs. 7,000. Nothing had gone drastically wrong with the company either since March when it was quoted around Rs. 12,000.

How did this happen? Let’s do some arithmetic on the figures of Infosys to understand how the irrational market values the fundamentals.

Infosys at its peak price of Rs. 12,800 commanded a market cap of a huge Rs. 85,000 crore. The market justified this on the grounds that the company was growing aggressively at near 100% per annum. In the financial year 2000, Infosys reported revenues of Rs. 882 crore. If we were to compound this figure at 85% annually for 10 years (as some people believed the growth would continue), then in the financial year 2010 Infosys would report revenues of a staggering Rs. 414, 176 crore.

At that time, assuming a market capitalisation of 100 times revenues (similar to what Infosys was quoting at its peak) it would put Infosys’ value at USD 9.2 trillion. The GDP of USA was around the same figure! It is surely not possible that Infosys can be worth as much as the entire GDP of the US.

If this cannot happen, two things are possible. One, that Infosys cannot continue to grow at 85 per cent, and second, that it cannot continue to quote at 100 times revenue. While I do not rule out momentum movements, I believe it is quite difficult to gauge the correct timing of entry and exit.

So, though Infosys is a great company a lot of people lost fortunes when they speculated on the stock price and bought the stock for capital gains. As against that, all who had bought the stock for cash flow and held on to the stock, irrespective of market fluctuations, are very wealthy even at today’s stock prices. This is the power of investing for the long-term in fundamentals.

The same is true with BitCoin at the current situation. At that time, technology was something new and was high on the market radar.

Today, it’s BitCoin. Nothing can gain values such quickly.

The prices are touching new heights in every few days. An insane hike in recent last few month.

bc-price-chart

FOMO (fear of missing out) is working at its high. 99% of the people investing in bitcoin are following crowd mentality. More or less gambling.

I received dozens of calls from my friends and cousins asking my views on Bitcoin. Never shown much interest. I think equity is much better class.

Exactly on Diwali, I invested a tiny amount of my portfolio in BitCoin and cashed out with +25% return within 10 days. Creating wealth such easy is not expected. We must learn to make money the harder way.

So since last few days, I jot down some realistic anti-BitCoin points which you should consider before entering BitCoin.

On developer’s note, I created my own non-scalable (on NodeJS platform) cryptocurrency weeks ago to check, How the underlying technological concept (BlockChain) that governs BitCoin work? How does mining work? How is the chain secured? and How is the overall blockchain consensus work?

Here’s a 2.4-minute long video snapshot of my desktop Command Prompt, illustrating the mining of digital currency and adding them to the blockchain accordingly.

It took me 2.4 minutes to mine 2 blocks on my normal laptop with a difficulty level of 5. Just imagine how much computational power and time does supercomputers takes to mine bitcoin with difficulty level of a trillion. Far beyond our imagination. That’s why bitcoin mining is not eco-friendly. More on this later.

However, this is out of scope for this article. Passionate people programmers can get in touch personally. At Fintrig, we are aggressively looking for implementing this technology in Equity Market.

Non-technical readers can go through this The ultimate 3500-word guide in plain English to understand Blockchain – WTF is The Blockchain?

Heads ups! Enough of it. Let’s get started with the flaws associated with BitCoin.

Insane Volatility.

Volatility exists where ever the assets are exchanged but governmental rules & regulations keep a tight check on the volatility and limit the upper/lower limits of price fluctuation.

For example, Technofab Engg only has buyers on 29th Nov so it halted at the upper circuit. Now, as per SEBI rules, transaction can’t happen beyond a specific limit of price change. Some have 5%, some 10% and some 20%, which is the case of Technofab Engg.

Whereas BitCoin has no regulations to control the volatility of the price. It can increase by 100% in a single day and can decrease by 50% another day.

No rules.

This makes it highly risky venture. An investor can make a lot of money and can also lose lots of money on other hands. Not Appreciated.

The urge to quickly make money with less/no work is not appreciated at all. Why do you want to get paid if you’re not adding values to society? It may be legal but not ethical.

Bitcoin is Not Eco-Friendly.

The energy spent on mining Bitcoins this year has surpassed that of 159 nations, according to cryptocurrency analysis website Digiconomist. This is equivalent to 0.13% of global consumption, it reported and added if miners were a country they would rank 61st. If consumption increased at this rate, Bitcoin mining is expected to use all the world’s electricity by February 2020 (Source).

Bitcoin Electricity Image

Bitcoin Mining (a process to create bitcoin) needs an ample amount of super computational power (Proof of Work) and the computer whoever first discover the solution of the puzzle (every 10 minutes average) gets 12.5 BitCoin – created out of thin air. And this is how the transaction is added to blockchain and that’s why its nearly impossible to change the blocks of transactions added to the chain. I’m in love with this blockchain Technology.

These computers are known as nodes which help to verify the transactions and add it to blockchain network in consideration of some reward. Current bitcoin mining reward for adding a block to the chain is 12.5 + transaction charges (nearly between 13 to 14 Bitcoins).

The rewards make everyone keep working in the network and for securing the blockchain. Currently, blockchain based cryptocurrency bitcoin have approx. 10k nodes.

Bitcoin nodes

Check out top left. 10856 current node as of 21 Nov 2017, 13:36:42. And maintaining those number of ultra supercomputers need a lot of energy.

Forever out of circulation.

Unlike banks, you can’t get your credentials back if lost, in case of Bitcoin.

All of your bitcoins will go out of circulation forever if you die without exposing your private keys. Private keys are unique keys associated with all the participant of BitCoin transactions.

Bitcoin is a decentralised ledger, so there’s no one who maintains the private keys of participants and there’s no way to recover it if you lost it so it’s very important to keep a backup.

Even if you lost your private keys, you’ll not be able to use your bitcoins because all the transactions are digitally signed by your private keys.

There are many bitcoins which are not in & will never come into circulation due to similar problems.

Another shock, even if you transfer your money to invalid public address, your bitcoins will be lost forever because it will be deducted from your account & added to the invalid public address which belongs to no one.

Anyway, it’s okay to tolerate these problems as it’s nearly impossible to break the secure region provided by bitcoin infrastructure. Better you read about blockchain, the underlying technology of bitcoin, then it would be really easy to clearly understand these concepts.

Lots of forks. Dividing community.

Crypto Currency is governed by a community of miners. More will be miners, more will be the security.

Bitcoin works on a predetermined code which is exposed to the general public on Github with 484 contributors. You can copy the code and create your own cryptocurrency in minutes.

And that code is used by mining nodes to maintain the bitcoin community. However, sometimes some miners don’t accept the changes and create their own parallel cryptocurrency with their desirable rules.

For example. Current Bitcoin transaction limit is 1 MB which limits the number of transaction every 10 minutes. So the miners who want to increase the size limit will fork out and create their own forked version with updated rules and regulations. It’s a bit complicated to understand. Dig out more (Tech readers).

First, there was only Bitcoin.

Then Bitcoin Cash forked out of primary Bitcoin blockchain. The price of primary Bitcoin is adjusted with the price of forked one. You can consider this as a dividend paid. Then Bitcoin Gold forked out. This will continue forever.

This is a very major drawback of Bitcoin.

Proven Investors Don’t Appreciate BitCoin.

Warren Buffett is not at all interested in the current BitCoin situation. He termed it a real bubble and warned people to stay away. Basant Maheshwari when asked about his views on Bitcoin, he replied:

Many Institutional players are highly bullish on bitcoin but remember, every financial disaster is preceded by a wide market bullish sentiment.

Financial crisis 2008 is the best example. Whole US market (including highly qualified banks) was bullish on real estate.

I would recommend you to watch the Christan Bail starer movie “The Big Short” which is based on an iconic person who gone against all the major institute of that time and bet against them, ending up making billions of money to his clients.

Its an elementary movie on America housing crash 2008 and how Michael Burray predicted the crash 2 years before and profited by going short.

Burry was a hedge fund manager. He shorted 2 years before the crash and ended up with high shorting profits when the market crashed.

“Fully aware that wonderful businesses make wonderful investments only at wonderful prices, I will continue to seek out the bargains amid the refuse.” — Michael Burry

And the same happened in internet boom in 2000. At that time internet was a new emerging concept. Today, it’s Bitcoin.

Bitcoin Not Serving its Primary Purpose.

After 2008 financial crisis, bitcoin was introduced by an anonymous person named Satoshi Nakamoto (via a whitepaper) to eliminate the need for middlemen in regulating currency.

But the current situation is completely ignoring the primary purpose. Instead of currency, it is used an asset class. Everyone wants to buy bitcoin and sell it at high priced.

But bitcoin can’t be used as currency because like Equity or Real Estate or Commodity, it doesn’t has any underlying value which can make it an asset.

It’s a virtual asset with no underlying cash flow values. It can burst anytime eroding a lot of money of innocent investors.

It’s impossible to use bitcoin as a currency. How can we determine a perfect price of products where the currency fluctuate every now and then?

Competitors.

There are so many emerging cryptocurrencies in the market. Those competitors can be a huge lagging factor for bitcoin in future.

Recently, BitTorrent inventor announces eco-friendly bitcoin competitor Chia. Even Indian Government Mulling Introducing Its Own Cryptocurrency.

And many other countries are looking for their own digital currency.

Even Federal Reserve made the statement to start their own digital currency but still, Indian Bitcoin buyers don’t seem to care.

A complete sign of a bubble.

Let’s see how it turns out.

Illegal Activities and Fraud.

In mid-May, countless people across the world were attacked by a malware program that locked their computers and demanded money to unlock, in an attack dubbed WannaCry.

The attackers received thousands of dollars in the form of Bitcoin. Bitcoin is anonymous and easy, which means its a favourite among criminals. Just how is Bitcoin used by criminals, how can you protect yourself from some Bitcoin scammers, and should Bitcoin face higher regulation to prevent criminals from being able to use the cryptocurrency?

This article shall delve into the dark side of Bitcoin, and look at some of the negative aspects that present themselves. Must read.

Bitcoin Exchanges are all private companies.

In India, one of the leading bitcoin exchange is Zebpay. It’s a private company. There is no regulatory institute to regulate the bitcoin transactions in India, to safeguard the interest of innocent investors.

It’s a grey area on the regulatory level. We might soon except a response from the center government. Most probably, negative.

However, Zebpay charges you 2% payment gateway charges on cashing in/out your money from their wallet.

Apart from this, additional transactional charges, they use to operate their company and a fraction go to bitcoin transaction change.

Even if you try to change the bitcoin wallet from Zebpay to any other or your personal. They will charge you insanely high.

There is a lack of transparency regarding different charges on their website. Again, not appreciated.

Also, Indian Bitcoin prices are much higher than international prices. Check out. This is not something reliable in long run.

However, Zebpay is meant for non-tech-savvy people. Tech people should maintain their own personal wallet.

Like Stock Market, we might soon expect much better way to transact bitcoins.

Wrapping up.

In the current bullish situation, everyone is trying to be a market expert but remember only when the tide goes out, you discover who’s been swimming naked.

Don’t get flooded away in sentiments. Nobody owns your money so Invest Wisely.

What if BitCoin price touched other new heights say, 20k or more?

Yes, the bullish trend in bitcoin may continue for years but it’s not justified. It can turn down anytime. There’s no height of irrationality.

No doubt, blockchain technology, which underlies bitcoin, has significant potential. But not bitcoin.

I’m actively taking questions related to bitcoin on my Twitter Handler.