Is Bitcoin a Scam?
Since its inception, there has been debate on the legitimacy of Bitcoin. It has been discussed now and then that it is a hoax and is scamming people’s money. This blog aims to discuss this topic in detail.
Origin of Bitcoin (BTC)
Bitcoin (BTC) was started back in 2008 by the unknown creator (or a group) known as Satoshi Nakamoto. It aimed to do direct peer-to-peer transactions. In simple words, it facilitates the payments between two parties without involving financial intermediaries (such as a bank). This makes transactions and payments, fast, transparent, and more importantly less costly. However, the system was established through a decentralized process which involves no controlling authority. So, like normal paper currency is controlled by the central bank of the respective country, unlike for bitcoin there is no such control.
It is interesting to check BTC prices in terms of dollars from a historic perspective to understand its current dollar parity and to debate its legitimacy. We can see that when BTC started, its price was below 1$, but over another decade, the BTC price went through several bull and bear runs. BTC prices peaked at 26.90$, 123$ and 1238$ in 2011, 2012 and 2013. At the same time in a bear run, the BTC prices fall below several times. In 2017, BTC crossed the threshold of 10,000$ and peaked at $19345. However, afterwards, a bear run pushed it back to under 7000$. This up and down moment continued, but in general, there is a positive trend in BTC prices still its start and after having an all-time high of around 65,000$, currently, its traded at around 20,000$.
Historic Price of Bitcoin
One simple question could be, why so much variation in the prices of BTC. A simplified answer to it is that BTC prices are purely market-driven (the demand-supply moments), and since there are hundreds and thousands of small, medium, and large buyers of BTC, thus the prices do fluctuate too their actions. In particular, the big buyers (known as Sharks, which mainly include individuals having bought many BTC when its prices were very low, or the institutions that hold a large quantity of BTC), do influence the prices.
Secondly, the supply of BTC is fixed at 21 million. It is interesting to note, that not all 21 million BTC were issued at its start. Instead, it has an automatic algorithm that rewards BTC to the BTC miners for every block of BTC. After every four years, the BTC block reward gets halved. Presently, there is a 6.25 BTC reward for a single block. Once, the 21 million BTC supply get completed there will be no more mining of BTC as its supply is fixed. So, it is important to learn, that if something has a fixed supply (like BTC) but its demand is high or keeps on rising with time, its price will go up. The same happens to BTC, even though its price fell overtime again, but as a general trend its price on the rise over the last 14 years.
Thirdly, nobody control BTC supply or its price other than the market, so it’s natural, that there is high volatility of the BTC against the dollar compared to the paper currency of any other country. Because, if another currency loses value against the dollar, the country of that currency changes the supply of its currency or dollar to manage the price moment, in the case of BTC it’s not possible, as it’s not controlled by any authority. Hence, we see a lot of variation in its prices.
Bitcoin and Paper Currencies
If we analyze BTC, we will know that it is not owned by any government and has no legal status in the majority of the country (only two countries namely the Central African Republic and El Salvador announced it as their official currency). In simple words, there is no one ownership of it. However, people are interested in buying it for its various benefits, mainly including the high return it may provide compared to any other financial resources. Some people buy it because they think it’s the future money. Yet, some people are buying it just because other people are buying it and making money out of it.
If we check its utility, we can find that it cannot be used for payment similar to a paper currency or debit/credit card, even though now in some cases some stores/firms announced that they will accept BTC too, but it still lacks the “general” acceptability like money.
Secondly, people use money as a “store” of value and can use it later for payment when needed. BTC cannot be called a “good” store of money. Because imagine, you bout BTC at 60,000$ to keep it as a store of value, and use it later, when you need it, but due to high variation in prices, by your time of need, its price is 20,000$. You without doing anything have lost almost 67 per cent of your “value”. On other hand, if you keep a dollar worth 60,000$ as a store of value, after some time, it will have still the same purchasing power. Even, if it loses its value in terms of other currencies, it will be highly unlikely that it will lose about 67% of its value in a short time. But with BTC that is quite possible and does happen. Finally, paper currency work as a “standard measure of value” which mean normally goods and services are measured in terms of paper currency. For instance, a laptop price is expressed in dollars. People are paid for their services in terms of dollars. At moment, not many places do use BTC for these purposes, hence, here too BTC has little or no use.
This writeup, summarize that in the present time, BTC has no major economic use other than making money from its high volatile prices in USD. However, BTC does have very limited economic usage (e.g., some stores start accepting it or announced to accept it in future, people think it’s a good hedge against inflation, as its return off-set inflation rate), which is increasing over time, and it presents promising future. However, this by no means implies that one should throw away everything one had, and put all that money in BTC because it may present some promising prospects.
In my personal opinion, every paper currency has its time of dominance and it ruled the world. With the start of digital currency, the dominance of the dollar is challenged. It is not unrealistic and does not seem like a distinct dream when all paper currencies will be replaced with digital currencies. In such an era, BTC will have a major position. Also, the role of the central banks in the money supply the way they have now will be very much changed and so do its monetary policy. However, I would skip this discussion from the current write-up due to having a different domain and focus.
Is BTC a Scam?
In general, we hear people saying BTC is a scam when its price goes down. At the time of a bear market, you will hear many people including prominent ones (such as Bill Gates), calling it a hoax and fake. For instance, these days (during 2022) when BTC fall from its all-time high of around 65,000$ to 20,000$, this news is very common. But when the price starts moving, this news starts disappearing from the media. So, we should be careful, before trusting this news for calling BTC a scam, but instead should analyse it by ourselves. As is the task of the media to report, and make big things out of small things.
To start with let’s define what is a scam? In simple words losing financial resources (or property) to someone for some fake promise of return. With the above background, if BTC is a scam, a real question is who takes your money if you lose money? Or who robe your money in a BTC scam? Is Satoshi Nakamoto robbing your money through BTC?
As stated, people make money when BTC prices go up, similarly, people lose money when BTC prices go down. A lot of people joined this market and BTC trading due to the possibility of having high returns. But high return and high loss are two sides of the same coin. If a trading promise a high return it will have also a risk of high loss. BTC do the same.
If a person makes money from BTC, what does he do? He buys BTC at a certain price and he sells it at a high price (assuming he took a long trade). In this case, did he rob the money of those who by chance bought the BTC at a high price and expected to sell it at much higher prices but unfortunately could not? The simple answer is no. Both persons wanted to make money, from BTC price fluctuations. Only that person makes money who could ride the tide of volatility in the right direction while all others lost it. If we assume that the total market value of the BTC remains the same all the time, then the loss of the loser became the gain of the winner, but since, the BTC market value is also fluctuating (in general increasing), we can say everyone can gain if they make the right decision, and not at the cost of the losses of others.
BTC trading is no different from other financial market tradings, with exception of having super high volatility. However, it also lacks ownership and control unlike the other financial markets trading that are fully controlled and restricted by the government policies and regulations. This limitation of BTC makes buyer-seller more vulnerable to any financial risk that a controlling body could promise to mitigate.
For instance, if a firm introduces its share in a financial market, and somehow it gets some fraud and some malpractices, they are unable to government authorities and there are chances that shareholders may get some relief in case of losses. But in crypto words, if a firm introduces a coin that comes out to be fake (shit-coin), there is no way the buyer of that coin gets their money back or has some relief as there is no controlling body for these coins.
The recent fall of the LUNA coin is a good example to quote. The coin was considered a good coin and was traded for above 100$. However, due to issues in its fundamentals, its prices suddenly fall to below 0.0001$ in a matter of hours. Although the firm behind LUNA gives relief to LUNA holders by providing them LUNIC coin, a new coin they launched. However, it was rewarded with a certain formula, in which not everyone gets their 100 per cent money back.
Some Words of Wisdom
Many experts in this area suggest if you have to go into the domain of crypto trading you have to be very careful. You have to make sure that you deal with only those cryptocurrencies that had a strong team behind them, a well-established ecosystem in the form of a community, having strong fundamentals and practical world usage.
Secondly, they also suggest putting only that money in these trades, that loss is bearable to you. Also, experts forbid investing borrowed money in cryptocurrencies in hope of getting a high return. Due to high volatility, it’s quite possible that instead of earning you may lose the borrowed money.
The most important advice of all there is, never put your money, until and unless you have learned the market yourself. If you randomly take a trade, there is a high chance you will lose money. If you follow someone’s signals, it means you are relying on someone else intelligence, which may/may not reward you. The best approach is to learn first, try paper trading for some time, and once ready, take that money which would not affect you financially if you lose it, and start trading. Always start with a small amount and gradually increase your portfolio.
Dr. M. S. Afridi