Is Bitcoin my next chance to riches?

Did you know that Bitcoin price, which was $520 per Bitcoin at the start of 2017 has been soaring and has already breached $2,200 mark? So Bitcoin could potentially give you 3 times return in 5 months, which is whopping 775% return in an year. What do you think? Invest or stay out?

Before I reason out why I don't think it's still worth your money, it is important to understand what Bitcoin is:

1. This is a digital currency. Bitcoin does not have any currency notes or coins that can be exchanged and is not backed by any government or anyone for that matter
2. Creation of this currency is digitally managed and hence no one has any control over supply of Bitcoins
3. Digitally created Bitcoins are mined (searched for) by Bitcoin miners. This requires extensive processing capacity and takes a lot of time and money (so don’t try!)
4. Bitcoin wallets are assigned to a computer (an IP address) and not to a person. So there are multiple ways in which Bitcoins are used for illegal transactions.

Now let us look at why value investors do not like betting their money on Bitcoin.

Normally, currency prices move up and down because their supply or demand is impacted by one or many of various macro-economic drivers, such as inflation, public debt, current account deficit and so on and so forth. Since Bitcoin is a digital currency, none of above apply to Bitcoin. So what must drive Bitcoin price (or perception of value) higher? There are only two factors, demand and supply. As mentioned earlier, supply of Bitcoins is constant and cannot be played with. So what remains that can influence its price is Bitcoins’ demand.

1. Increased demand owing to use of Bitcoin as a transaction currency – In Jan’17 highest confirmed transactions using Bitcoins were 346K, compared to highest of may 370K, so transaction volume hasn’t drastically increased during this year to crown Bitcoin as a mainstream payment medium, and hence justify higher valuation
2. Increased demand for speculative reasons – Current data suggests that most of the increase in price is driven by increased demand in Asia, mainly driven by speculative motives. Recently, Japanese government recognised bitcoins as a currency and also did Ransom ware give it some Press. So people are buying this currency, not to use it to transact but to hold on to it and sell when the price rises.  

Is it similar to people buying houses not to live in or earn rental income but to sell when the prices rise in short term? Even better, this is like wanting to buy a house that does not exist with a hope to sell it at a higher price to someone else looking for a house that does not exist.  

Bitcoin Price will keep rising as long as existing investors have holding capacity or new punters enter the market. As soon as either of the two plateaus, prices will start feeling pressure and would eventually fall to a more realistic level, which is way below current price of $2,200.

After all, any investment that is too good to be true, is most of the times too good to be true. 

**views expressed in this article are personal views of the author