By Antony Mutunga
In 2009, the world witnessed the emergence of a mysterious technology, at a time no one imagined the e-money would amount to much. The technology, which came to be known as Bitcoin, was the work of Satoshi Nakamoto who mined the first ever block, the genesis block, for a reward of 50 Bitcoin after many years of research and development.
Bitcoin though, did not start off on the right track as in the year it was introduced to the world; it went for close to nothing and in its second year, 2010, it wasn’t even able to pass the dollar mark. This was a difficult period for the technology that was referred to as the first practical solution to a longstanding problem in computer science called the Byzantine Generals Problem (BGP). However, in time, things started picking up as people got to understand what Bitcoin was all about, and the advantages that one could benefit from it.
It has now been eight years and Bitcoin has reached heights that were thought impossible. From one Bitcoin being worth close to nothing in 2010, it is now worth over Sh740,000. This has seen the crypto currency become quite popular all over the world as people, especially millennials, move to invest in it in order to enjoy the good returns it has to offer. Bitcoin has even helped push the larger crypto currency market to new heights, as the combined market capitalisation of all crypto currencies is now over $200 billion (Sh20.7 trillion).
Even though Bitcoin has enjoyed a successful period, it has recently faced some difficulty that has most people questioning if maybe it is time to abandon it. One of the biggest problems that the crypto currency is facing now is due the fact that it is decentralised. Before reaching the heights it has now, most governments saw Bitcoin as a novelty and thus they did not see the need to regulate it.
However, things seem to be changing as some governments start feeling the impact of allowing the ever-growing currency in their territories. This is due to the fact that by allowing Bitcoin, people have been able to evade paying their taxes while others have moved to use it for criminal activities. As a result, a number of countries have banned its exchange for local currencies. For example, China, concerned about the use of Bitcoin in capital flight and tax evasion, announced the ban on Bitcoin exchange in September this year.
India is about to follow suite. This is after Shri S. Ganesh Kumar, Executive Director of the Reserve Bank of India (RBI), intimated that Bitcoin will not be allowed in the country. “Our current position on Bitcoin is that we will not be using it for any payments and settlements…. However, the technology underlying crypto currencies will not end,” he said.
There is also the risk that there is a Bitcoin bubble, as warned by many investors who feel the crypto currency will soon implode and cause a disaster for those who have invested in it. Investors such as Warren Buffet and Nouriel Roubini, better known as Dr Doom for predicting the 2008 financial crisis, have all made their thoughts known regarding the ‘Bitcoin bubble’.
Those who believe there is a Bitcoin bubble argue that there is no fundamental reason behind the current increase in its price level. Therefore, the only reason that could explain the increase in the price levels is what is known as the greater fool theory. The theory states that the price of a product is not determined by its value but by the beliefs and expectations of the market participant. Therefore, in this case, the reason behind the price surge can only be the fact that most people are buying and holding Bitcoin in the essence of selling it back at a higher price.
Henceforth, if everyone were to decide to convert their Bitcoins into fiat money the results would be catastrophic. This is because it would lead to the Bitcoin market drying up, which in turn would cause the prices to fall. As a result, this would eventually lead to the crash of Bitcoin, which would result in major losses.
Apart from this, Bitcoin also has another major problem in forking. A fork in terms of Bitcoin refers to the splitting of the chain that Bitcoin runs on, making it go on a different path with its own set of rules. Forking is usually categorised into hard and soft fork. Hard fork usually refers to a permanent split from the block-chain. For example, this year Bitcoin has already seen two hard forks that have resulted in the establishment of Bitcoin cash and Bitcoin gold. On the other hand, there is soft fork, which refers to changes that take place without splitting from the block-chain.
A fork in Bitcoin usually affects the value of Bitcoin as it means there is a disagreement in the Bitcoin community about the way forward. In November, advocates of a Bitcoin hard fork were planning on what is known as the Segwit2x hard fork, which would have split the Bitcoin block-chain in two. Even though the hard fork was cancelled, it seemed to have affected the value of Bitcoin for a short while before it soared again. With there being a possibility of the hard fork coming up again soon, it may end up causing the value of Bitcoin to fall.
Bitcoin is currently in a stable position regardless of these problems. However, it is important for crypto currency users to start identifying other crypto currencies that they can move to in case the so-called Bitcoin bubble ends up bursting or worse yet, Bitcoin ends up being banned. Some of the crypto currencies that are doing well despite the dominance of Bitcoin include Ethereum and Litecoin.
Litecoin is among one of the oldest crypto currencies – it came after Bitcoin – and was launched in 2011. It is often referred to as the silver to Bitcoin’s gold. The current worth of 1 Litecoin is over Sh6,600. On the other hand, Ethereum is newer, having been launched in 2015. It is however more valuable than Litecoin, and one is worth about Sh33,000. Other notable crypto currencies include Bitcoin cash, Ripple (XRP) and Zcash.
Bitcoin, regardless of all these warnings, continues to soar. However, to be prudent, investors would be advised to diversify to guard both themselves and the market. In addition, unless the Bitcoin community finds a way to deal with these problems, we might soon be seeing the crash of one of the best digital currencies the world has known or had. ^