The emergence of cryptocurrencies as an economic instrument has been one of the biggest tech and finance industry trends of the past five years. From a whitepaper written by the pseudonymous Satoshi Nakamoto, it has emerged as a valuable commodity that is traded online through exchanges across the world. But is Bitcoin a scam? Is it really an object of value or are traders deluding themselves?
A short disclaimer; none of this is financial advice. I'm not a financial advisor so don't make financial decisions based on the content of this article. Do your own research before making any financial decisions about trading in Bitcoin or any other cryptocurrency.
What Is Bitcoin?
Bitcoin is a virtual currency that is created though a process called mining. Mining involves the completion of complex mathematical problems that "unlock" Bitcoins with the creation and trading of coins stored on a distributed ledger called a blockchain.
Blockchain and Bitcoin are sometimes used interchangeably but they are different things. The blockchain is a kind of distributed database and Bitcoin is an application that uses it.
Can I Use Bitcoin?
We've just passed Pizza Day. On 22 March 2010, Laszlo Hanyecz spent 10,000 bitcoins on two Papa John’s pizzas worth around $25. In today's money, those pizzas would be worth around $65M. But, at open point in January, those pizzas were worth close to $200M.
Bitcoin can be used in some places to purchase actual goods. For example, a number of retailers at Brisbane Airport now accept Bitcoin and other cryptocurrencies for purchases.
So, there are real world uses for Bitcoin.
Where Is The Value?
This is the interesting question. Fiat currencies are issued by central banks and used by the public and the government to purchase goods and services. In contrast, there is no centralised mint. Bitcoin is created by using computing power to solve complex equations.
That's what makes it like physical mining. part of the value of gold, coin and other commodities comes from the effort required to access it. There is a cost in creating Bitcoin. That computing power requires lots of CPU cycles (or, more accurately, GPU cycles in the case of Bitcoin) and those cost money. At the moment, based on Australian power prices, it costs more to mine bitcoin than the current market value.
The other element of value is usability. We know Bitcoin can be used in real-worlds transactions, albeit in a fairly limited capacity today, but to say it's useless and without value is probably a stretch.
Is Bitcoin A Scam?
The simple answer, in my view is a qualified no. That's because the jury is still out on the long-term viability of Bitcoin.
The cryptocurrency market is still in its infancy. While Bitcoin was the fist cryptocurrency, it's far from the only one. We're getting close to 3000 different cryptocurrencies being active or in development. That's led to a vigourous but largely unregulated marketplace where fraudulent activity and unscrupulous operators are in plentiful supply.
So, there are lots of scams and scammers out there. For example, at a recent security conference, representatives from a state police force in Australia discussed a case, which hasn't yet reached the courts, where a company was defrauded of $5M of company finds in a cryptocurrency scam.
In January this year, an elaborate scan was set up around the Intitial Coin Offering for a new currency called Prodeum. Early "investors" lost millions of dollars as the fake project collected the funds and disappeared, leaving just the word "penis" on the Prodeum website.
While there are scams in the cryptocurrency world, just as there are in the real world, that doesn't mean Bitcoin is a scam.
Bitcoin is currently the most valuable cryptocurrency by most measures. A lot of that comes from being the first cryptocurrency and its first to market position. But with almost 3000 other coins around, that early advantage could be eroded over time.
Other coins are emerging that are trying to integrate with existing financial structures and, while they might not be as valuable today, that may give them a longer-term strategic advantage.
As an early adopter of blockchain technology, Bitcoin is hampered by slower transaction volumes than new coins that can take advantage of newer technologies.
It's also likely, in my view, that many of those 3000 or so coins will disappear and become worthless in time. That's often the order of things in new markets.
While Bitcoin looks like a coin that will be here for a while longer, no one really knows what the cryptocurrency market will look like in a year, much less another five years.