A few weeks ago, I hailed a taxi to get home and after a few minutes, the driver asked me whether I was investing on the stock market. Very quickly, he was giving me a ‘hot tip’ on how fast I could become very rich by purchasing Bitcoins.
An alarm bell went off in my brain. When your cab driver gives you financial tips, it means that we are in a bubble that is about to burst. Cabbies are great but their job exposes them to a broad range of people who reflect the current attitudes, trends and fads.
An alarm bell went off in my brain. When your cab driver gives you financial tips, it means that we are in a bubble that is about to burst.
There are lots of mysteries around Bitcoins. The Bitcoin is a cryptocurrency that was created in 2008 by a mysterious man named Satoshi Nakamoto. By definition, a cryptocurrency is a currency that doesn’t have any physical reality, it only exists online. Nakamoto has created an open source algorithm which, when it is executed by anyone, can create, or mine, Bitcoins. However, he has set a policy based on artificial scarcity, as the quantity of bitcoins is limited to 21 million. Also, the more this algorithm is run, and therefore the more Bitcoins are being mined, the longer it takes for the miner to execute it. Those two conditions together are the main reasons why the Bitcoin value is increasing—similarly, we know that gold reserves are limited and that we need to mine deeper (which takes more effort) to find more.
Let’s reflect on this for a minute. Imagine that in a microcosm (for example your close family) you decide to create your own currency by marking each page of a 100-page booklet with a special stamp. Each page will have a similar value and you decide to use this currency to buy items and services between family members: a book will cost 5, a DVD will cost 7, vacuuming the house will cost 3… However, you won’t be able to go shopping with your currency as it won’t be accepted outside your house. The page-and-stamp money has a real value accepted by all the family members, and because it is limited in volume, its value increases or decreases with what is accepted by its users. If a new member decides to be part of the group, they will have to buy the new currency from the other members—the more people who want to join, the more the currency will become exclusive and therefore expensive.
That’s exactly what is happening with Bitcoins at a wider level. The currency is accepted by the people who see it as an exclusive value, and the more people who are interested in it, the more its value increases since its volume is limited. And because this currency is ruled by supply and demand, and not by any monetary policy, the fluctuations are more unpredictable because of this lack of control.
So, should we invest in Bitcoins? To assume that cryptocurrencies won’t be a major monetary force in the future could be denying reality, as cryptocurrencies are already in use by a large part of the Internet community. However, we should always remember the reason why we invest money in markets: we invest in businesses that we believe have a future. A second reason flowing from the first is that, if these businesses have a future, it’s likely that they will be profitable and provide dividends. But investing with the sole intent of making a quick and easy profit is simply gambling, and therefore should involve a level of caution and moderation. However, if you want to set up the Bitcoin as a new currency in Dynamics NAV and transact with it, be sure that it will be as easy to do as any other currency in the system!