The bitcoin paradox
Over the last 10 odd days, I have been a mute witness to conversations where multiple opinions have been exchanged on whether or not bitcoins ought to be part of an investment portfolio. As things are, it is a hotly debated subject. Bitcoins are apparently coveted assets, and the least understood as well.
Why they are coveted is easy to see. Over the last year, the price of a bitcoin has moved only upwards-from $750 around this time last year to over $7,800 as I write this out on a Friday at the close of market hours in the US. The chart shows some wild fluctuations as well in preceding months when it fell from over $6,000 to the $5,000 region. The overall momentum, though, has been upward. A few people have asked me if I think it a good idea to add bitcoin as an asset class. Until now, I have refrained from uttering as much as a peep.
Then there is the fact that earlier this week, the Supreme Court of India admitted a plea to regulate the flow of bitcoins into India. The SC has also sought a response from the central government. While I haven't been through the submissions in the plea, I'm willing to put my neck on the line and submit that the plea must be a ridiculous one and the handiwork of a clueless creature that understands nothing about peer-to-peer (P2P) technology. If anything, the court ought to have dismissed it as a frivolous one and fined the ones who filed it for wasting their time. For the life of me, I don't know why the SC should be dragged into this.
As ideas go, I think bitcoin is a fabulous one. Philosophically, it is a beautiful construct. This is where the problem and the paradox inherent to it lies as well. The current spike in bitcoin prices are being driven by those who believe in bitcoin as a political statement-an ideology, if you will. Their fight will continue even if they lose money. Gains from it are the last thing on their mind. I'll come to that in a little while on the back of my notes from an encounter with the legendary Richard Stallman in an earlier avatar of mine.
As things are, my stated position is this: those who invest are inevitably pragmatic creatures. When looked at from their perspective, getting into the market on a spike driven by ideology is a bad time to invest. That said, I think I ought to make an attempt to deconstruct each of my assertions here.
What is money? At a very basic level, money is what you are willing to offer for something you may want. In the past, people used to barter goods for services offered. As societies grew larger, a compelling need for formal money in the form of promissory notes evolved. When demand for these notes increased, to keep track of who owes whom how much, banks emerged.
To regulate how banks in any country behave, a central bank (like the Reserve Bank of India) is the accepted norm. These are powerful bodies because they are mandated by governments and trusted by people to issue promissory notes-pieces of paper underwritten by the sovereign government. A holder of this note can use it to buy something as opposed to bartering in the past. It makes life easier. The limitation with money of this kind is that it can be used only within a certain geography. Outside those boundaries, another sovereign has its own muscle and issues its own currency. But currencies can be traded. Their intrinsic values may differ though and depend on many economic variables. These variables are what those who dabble in the money markets play around with and earn billions of dollars as margins each day in speculating where may the future lie. As for you and me, the more money we have, the better off we are. So, everybody wants more money. But because the dynamics of the money market are complex, the central bank has a crucial role to play. At any given point in time, it must ensure only a limited amount of money circulates within the system. And people have to compete legally to earn it. Anybody who tries to game the system must be penalized.
This also places a huge moral and fiscal obligation on the central bank. To keep the trust of people going, the authorities, led by its chief (in India, the governor of the RBI), must weigh in on complex economic issues to ensure the promissory note it issues contains an intrinsic value. If the bank prints too many of it, people won't value it and a country's economy can collapse. That a profligate central bank can drive an economy to collapse is the reason why Zimbabwe has now gone to the dogs . While the happenings in Zimbabwe have not impacted the global ecosystem, most people are familiar with what can happen if the system is gamed as it was in the last decade. It eventually led to the collapse of the global financial order in 2008. Remember the excesses committed on Wall Street, the financial capital of the world? How it was done was meticulously documented by Michael Lewis in The Liar's Poker and The Big Short. Between the book and the film, Lewis, a former bond trader on Wall Street, recounts in much detail how, on 15 September 2008, Lehman Brothers filed for bankruptcy and the global financial ecosystem collapsed. It was not because crucial people were in the dark, but because everybody who ought to have kept watch was hand-in-glove.
Hundreds of millions of people across the world lost their homes, jobs, savings and lives. But for all practical purposes, those who ought to have gotten indicted were let off with a rap on their knuckles. Now, pushed to the wall and compelled to offer an opinion on whether to invest in bitcoin as an asset, personally, I would stay out. I'm willing to get into an all-night slugfest over an ideology. But let's keep the money out of it. To that extent, I'd go with pragmatism as opposed to idealism. And yes, I know it sounds terrible.