Fintech Singapore

Fintech Singapore | Taking a Byte out of Bitcoin


The cryptocurrency floodgates have been flung wide open and the bandwagon is taking on passengers aplenty. Bitcoin techno-jargon fills conversations from boardroom to dining room and on most days, it occupies news columns both online and in print. However, mass acceptance might not indicate investor savvy. As the time worn agage goes, “all that glitters is not gold”, and despite the hard forks spawning many new variants like Bitcoin Gold and the like, perhaps it would be prudent to curb the runaway appetite that many have developed for digital money.


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Punting on Bitcoin


Fintech - Bitcoin


Bitcoin is the progenitor of all the other 1,323 cryptocurrencies in existence today including the important alternatives like Ethereum, Bitcoin cash, Ripple and Litecoin to name just a few. It is, today, the primary cryptocurrency in terms of volume traded and market capitalisation; all this due to its meteoric rise in price over the last few years. When Bitcoin was first mined in 2008, it was shunned as worthless. 2 years passed before it was worth US$1. In 3 more, it hit US$1,000 by the end of 2013. 4 years later, in November 2017, it surpassed US$ 10,000. December 2017 saw Bitcoin rise just over 100% to breach US $20,000 by midmonth before falling back to the less exuberant neighbourhood of US$15,000. As an investment vehicle, it has minted a new generation of millionaires and at least 35 billionaires, with the Winklevoss twins of Facebook fame being the most prominent figures. As a medium of exchange, it has had a much less exemplary performance. There are currently about a 100 businesses that accept Bitcoin for goods and services. Although, it was once a wildly popular de facto medium of exchange on the illicit Silk Road platform that traded every manner of contraband and criminal services.


The Good, the Bad; Putting it on Paper


Cryptocurrency is the digital disrupter of the monetary system and like the conception of every bright idea, its creation was an altruistic attempt to make a better, fairer world. To this end, Bitcoin and its cryptocurrency cohort has big ambitions. Entrenched into its very being is its goal of being a decentralised system of currency that retains more control with the owner while lowering lowering transaction fees and increasing security against fraud.


A decentralised, peer-to-peer electronic cash system was meant to democratise transactions and return the rights of parties to make transactions to those involved without governments and financial institutions holding a monopoly on the monetary system. This freedom is supposed to enable payments anytime with short settlement times, anywhere and to keep transaction fees low by dispensing with third parties like banks and lawyers.

Fintech - Bitcoin Security

Image: notbeinggoverned


The other primary advantage of Bitcoin is security. Counterfeiting and fraud is supposed to be near impossible because each transaction and balance is verified by ‘nodes’ in the blockchain community, that number in the thousands, instead of a central system. Unlike means of payment like credit and debit cards, where a merchant or malicious individual with a scanner has access to a person’s entire available source of funds with the credit card details in hand, Bitcoin operates on a system where the individual specifies and authorises only the exact the amount of the funds to be transferred. This complete personal control of an individual’s bitcoin wallet owner also means that, at present, no institution can freeze an account arbitrarily for any reason.


Access to a bank, atm or money exchange is not universal. Adding to that, certain countries, especially those experiencing runaway inflation have little trust or use for traditional financial institutions. Having a bitcoin wallet and a cell phone enables trade and purchases to carry on as usual. In Kenya and Zimbabwe, cellphone based money transfer is commonplace and had been established for a number of years in the absence of a stable local financial system. Where once these cellphone based money transfers operated with a more stable foreign currency like the US dollar, they are now turning to cryptocurrencies like Bitcoin.


Image Source: African Leadership Magazine


For all of Bitcoins aspirations to come to fruition, it has to gain more credibility. It is ironic that this has to come from the establishment itself, such as banks, governments and merchants. People power itself is insufficient, although a romantic notion. However, as a good sign of its continued survivability, hedge funds and private banks have begun to join in the action. As an institutional nod to Bitcoin, futures contracts have also been offered by the Chicago Board of Options Exchange (CBOE) and stock brokers, CME Group. At home, even the Singapore Government has been quick to make its own forays into this fledging currency with a series of blockchain experiments called “Project Ubin”.


Image: The Federal Government Contract & Procurement Blog


On the flipside, there are still several disadvantages that bitcoin has to overcome before it can fulfill its raison d’etre. Bitcoin is increasingly backed by fiat money as new accounts open on bitcoin exchanges like coinbase. As it is not in itself legal tender, and not universally accepted, it still has to be benchmarked against major currencies to determine its value. An influx of speculative money has been pouring in and consequently led to volatile changes in the value of Bitcoin. Before this year, Bitcoin had been through dramatic price increases, in 2011 and then twice in 2013, crashing each time. Stability is necessary for Bitcoin to be accepted as a medium of exchange. Without which, an anticipation of increasing value would lead to hoarding, just as an expectation of falling values would lead to a flight to quality.


In addition to a wildly fluctuating price, transaction fees have also not been able to stabilise. Owing to an unexpected surge in demand for bitcoin and a transaction fee system that allows users to expedite a transaction by paying higher fees whenever a blockchain has exceeded its capacity, these processing fees have dipped and risen almost as dramatically as the value of Bitcoin itself.


In Spite of numerous safeguards, and a high level of fraud security, Bitcoin exchanges themselves have been hacked on several occasions. The most recent occurrence cost Seoul based exchange, Youbit, US$ 35 million and caused its bankruptcy.


If that isn’t enough, the proliferation of other cryptocurrencies is a threat to its survival that stems from its successes. A hard fork is known in tech-parlance as a divide of an existing cryptocurrency into 2 separate currencies, such as Bitcoin and Ethereum or Bitcoin Gold. The surge in competing cryptocurrencies, saturates the market with multiple versions of the original, confusing users, discrediting the notion that the supply is limited and also consequently causing a price drop.


Image: The Independent


Royal Bank of Scotland chairman, Sir Howard Davies is counted amongst Bitcoin’s detractors, together with JPMorgan’s Jamie Dimon who called Bitcoin a “fraud”. Bill Gates and Richard Branson are amongst several luminaries in the camp of supporters. The potential and the pitfalls of Bitcoin and its cryptocurrency can almost be envisioned from the list of its advocates and opponents. As an early stage technology, there is still a long list of kinks to iron out before the dust settles. Regulation will only increase and there will come a time when this anti-establishment currency will be inducted into financial institutions but, the writing is on the wall and it is here to stay.


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