Bitcoin: The future of money?

SINGAPORE: Bitcoin has continued its upward trajectory, rising to another record high last week.

The cryptocurrency, which was launched in 2009, has seen some volatile moves. It made headlines in 2017 when it soared 20-fold from the beginning of the year to almost US$20,000 by December.

But the euphoria fizzled out, and Bitcoin sank below US$5,000 by October 2018.

The years 2018 and 2019 were bear markets for the cryptocurrency.

It recovered all its losses by December 2020, and has been on a roar since then, hitting new highs every month in February, March and April.

Market watchers such as Jeffery Halley have said this is a sign of “undeniable speculative momentum” towards Bitcoin.

"Whether you believe in crypts or not, you have to respect the momentum of the trade," said Mr Halley, senior market analyst at Oanda.

"I'm not prepared to say that this is the top of Bitcoin. It could well trade to US$100,000 on speculative mania over the next couple of months.”

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Fears of currency debasement are driving investors into cryptocurrencies.

Mr Steve Brice, chief investment officer at Standard Chartered Wealth Management, said the printing of money by central banks is a contributing factor.

“Central banks around the world are generally printing a lot of money trying to create inflation, trying to inflate debt away ... People are worried about whether the dollar or the euro or sterling will be a good store of value going forward,” he said.

A store of value is something that does not change in value, or whose value goes slightly higher, when inflation is taken into account.

Traditional asset classes include alternative currencies and gold.

Some market watchers are concerned Bitcoin's dramatic price swings prevents it from being a reliable store of value.

“They think they can make some quick money, and that usually is ultimately a recipe for disaster,” said Mr Brice.

Prof Duan Jin-Chuan, executive director at Asian Institute of Digital Finance, National University of Singapore, added: We have seen historically so many speculative instruments ... They will rise, and they will have a self fulfilling prophecy, propel them on for a while, and then collapse."

But there are proponents too.

Tesla’s CEO Elon Musk has thrown his weight behind the cryptocurrency. Tesla’s Bitcoin holdings now represent an eighth of the company’s US$19 billion cash pile.

The electric vehicle maker has also said it will start accepting Bitcoin for its products soon.

Other corporate giants and Wall Street heavyweights have also jumped in on the Bitcoin trend.

READ: Can cryptocurrencies and their vast energy use co-exist with Singapore’s green goals?

In March, Morgan Stanley said it would offer its clients access to Bitcoin funds. Goldman Sachs is also set to offer cryptocurrencies to investors. And Mastercard will begin facilitating payments in cryptocurrency this year.

"The banks tend to follow the money," said Mr Halley.

"If lots of clients want to trade cryptos, the banks are going to offer that service to them ... Also they can see a lot of volatility and money being made, then they're naturally drawn towards that as well."

More institutional money is expected to flow in. A report from Citi found that nearly 20 per cent of advisers are contemplating investing in cryptocurrencies this year, up from 6.3 per cent in 2019.

In the payments space, payments infrastructure provider, PPRO, is observing a growing acceptance of Bitcoin, especially among traditional financial institutions that would not have touched cryptocurrency previously.

“We are seeing a lot more interest being driven by the consumer, and consequently, the actual merchants. This cuts across all ranges of industries that are now starting to accept Bitcoin online, things that you wouldn't expect like restaurants accepting Bitcoin payments for sandwiches and fried chicken. This is certainly a global trend that we're seeing,” said Mr Tristan Chiappini, vice president and head of APAC (Partnerships), PPRO.

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Still, it is undeniable that Bitcoin is volatile, said market watchers. Businesses that accept cryptocurrency as payment will need to hedge their risks, in the same way they hedge foreign exchange risks.

This means added costs.

Already the transaction fees for Bitcoin are not cheap. Users have to pay a fee to miners in the Bitcoin network to process their transactions.

According to data provider, BitInfoCharts, the average transaction fees have been on an uptrend since mid-October last year, reaching a high in February this year.

Despite all this, market watchers said firms will still accept such costs, if the business is lucrative enough.

PPRO believes Bitcoin will evolve to become another method of cashless payment.

“At the end of the day, the reason why merchants are wanting to start to accept Bitcoin is because consumers are wanting to pay with Bitcoin. It’s becoming one of those preferred ways to pay, like GrabPay and PayNow here in Singapore. So Bitcoin could be one of those going forward,” said Mr Chiappini.