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Saturday, March 30, 2024

Bitcoin 101–To buy or not to buy?

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I realized how mainstream bitcoin has become when my 90-year old aunt asked me about it. I do not think my answer that it is a cryptocurrency enlightened her. Her blank stare and continued silence mean that I did not do a good job answering her query. So for my aunt and others who are interested, here’s my report on bitcoin.

What’s a cryptocurrency?

Finder.com reports that the crypto part in the name “cryptocurrency” comes from the fact that transactions—the act of transferring assets such as currency and digital or real-life assets between a sender and a recipient—are encrypted for security, a process known as “cryptography.” This process ensures the security of the transaction and protects the identity of the transacting parties.

Cryptocurrencies are also referred to as virtual currencies. In 2012, the European Central Bank defined virtual currency as “a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community.” While bitcoin is the most known of the cryptocurrencies, it is not the only one that can be traded. As of this month, there are 1384 cryptocurrencies in existence, including Ether, Litecoin, Bitshares, and Monero. 

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How are bitcoins created?

Bitcoins are mined. There is no physical mountain where one goes to mine, instead miners validate transactions in cyberspace. As a reward for their efforts, miners get new bitcoins. In theory, anyone with access to the internet and suitable hardware can participate in mining. In practice, mining bitcoins is a painstaking and expensive endeavor.  

Is it worth mining bitcoins?  

Yes and no. Once a miner has verified 1 MB (megabyte) worth of Bitcoin transactions, they are eligible to win the 12.5 BTC. At today’s rate, that’s P7,061,396.43! However, there is no guarantee you will be awarded the prize. You also have to be the first miner to arrive at the right answer. To be the first, you will need a lot of computing power, which means having to invest in very expensive supercomputers.

Is there another way to get bitcoins?

An easier option is by exchanging traditional currency for bitcoin. Here in the Philippines, you can buy it on an exchange. The Bangko Sentral ng Pilipinas has authorized two virtual currency exchanges in the Philippines, namely Betur (more popularly known as coins.ph) and Rebittance. As of January 29, one bitcoin is equivalent to Php 564,640.

How do you use bitcoins?

In today’s online world, bitcoins and other cryptocurrencies are becoming the favored means of payment. Bitcoins can be used to pay for online transactions. However, for most, bitcoins are seen as investments. Social media has been inundated with stories of bitcoin millionaires since that value of bitcoins has surged since it was first mined and traded in 2009. Then, each bitcoin was valued at only P4.50 each.  

Of course, hindsight is 20/20, and only computer geeks would have been the early investors. So, what if you decided to invest in bitcoins two years ago? If you bought two bitcoins in January 30, 2015 for P20,194 and held it for two years, your two coins are now worth P1,127,418.29 or a gain of 4,583%! So, yes, you would have been a millionaire today.

Is it legal?

Currently, cryptocurrencies are not regulated by the BSP. In BSP Circular No. 994, Series of 2017, our regulatory body clearly states that “the BSP does not endorse any virtual currency, such as bitcoin, as a currency since it is neither issued or guaranteed by a central bank nor backed by any commodity.” However, the BSP and many other central banks may consider regulating it because of its “volatility, decentralized nature, perceived threat to the current monetary system, and link to illicit activities like drug dealing and money laundering.”

So, should you invest in bitcoins?

I asked this question to my financial advisor. Her answer was “NO, NO, NO!” The Motley Fool, an investment advisory service, has strongly cautioned its followers against investing in bitcoin, as have several of the world’s central banks and financial gurus. 

Going against the advice of these professionals, I joined the bitcoin bandwagon earlier this month. While I kept to the rule of not investing money that you cannot afford to lose, I had high hopes of making some money on my P15,000 investment. Yes, I am now the owner of 0.0204 bitcoin (at that time, 1 bitcoin was equivalent to P731,726). Two days after I invested, my small investment rose by P3,000. But because greed got the better of me, I did not sell hoping for even greater profits. Three weeks later, my money is down to P11,177 (today’s rate is 1 bitcoin = 564,640). 

So, to answer the question, should you buy bitcoins, I would say no. As I learned the hard and expensive way, it just is too volatile!

The author is an Assistant Professor in the Management and Organization Department of the Ramon V. del Rosario College of Business of De La Salle University. She is currently on her sabbatical leave. The views expressed here are the author’s and do not necessarily reflect the official position of DLSU, its faculty, and its administrators.

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