Bitcoin: Definition and Guidance for Beginners
As I recall, I bought my first Bitcoin more than 10 years ago.
At that time, I hired a freelancer to do graphic designing work. He requested his mode of payment to be in Bitcoin. Hence, I’d converted some MYR into BTC and paid him for his work. Upon my payment, I retained the balance of BTC in my wallet, which was worth under RM 100 at that time, and never really looked at it.
Fast forward today, the value of my BTC holdings skyrocketed to RM 18k.
Source: Screenshot of My Crypto Wallet
Such a return, from under RM 100 to RM 18k, is what drives many people, both the rich and the poor, to get into Bitcoin. Sure, there are instances when people lost 70% quickly in Bitcoin. But, the promises of doubling and beyond one’s money have kept many to keep some “play money” with Bitcoin.
Such is the mentality of “High Risk, High Return” or “Double or Nothing”.
In this article, I’ll like to pen down 5 thoughts that I have for anyone who has an interest in getting started with Bitcoin.
1. What is Bitcoin?
Let’s start with the basics.
Bitcoin is a type of cryptocurrency. Cryptocurrency comprises 2 words: “crypto” and “currency”. Crypto refers to the use of encryption to verify transactions. Hence, in many ways, it is more secure. Currency, like our MYR, SGD, and USD, is what we use to exchange and store value.
Typically, the value of a currency is dependent on the strength of its issuer. Take USD as an example. It is valuable because of America’s dominance in the world. Of course, Renminbi is rising in global significance as China is rising in economic and military prowess on the world stage.
But, what about Bitcoin? Who is its issuer? Well, the identity of its founder is as of now, a mystery. No one knows who Satoshi Nakamoto (the developer of BTC) really is. Since Bitcoin is not issued by any central bank, it has no intrinsic value. Hence, the value of Bitcoin is dependent on the level of trust that people would have on it, or should I say, the level of distrust on paper money.
2. Bitcoin’s Features
There are several features that attract people to have some Bitcoin:
i. Bitcoin is Global.
Bitcoin could be received and transmitted internationally. If we live in a world that transacts only with BTC (1 currency), there is no need for currency exchanges. Such allows us to save billions and possibly trillions on fees related to currency exchanges.
ii. Bitcoin is Decentralised.
Take MYR as an example. If we earn and save MYR, I believe we are placing our trust in the Malaysian government or central bank in safeguarding the value of MYR. As for Bitcoin, there is no need to place any sort of trust to any entity to keep its value.
iii. Bitcoin Transactions are Irreversible.
It means once a sender has sent BTC to its recipient, the transaction is final and cannot be reversed.
iv. There is a limit of 21 million BTC that can be Produced.
Unlike currencies we own today, which can be ‘printed’ in limitless quantities, the maximum quantity of BTC in circulation is set to be 21 million. That denotes some level of rarity. Because of its rarity, some view BTC as a form of digital gold.
3. Is Bitcoin an Investment?
Let’s define what an investment is.
I view an asset to be an investment if it can produce and create value on a regular basis. For instance, real estate is a form of investment. This is because we could earn rental income from offering livable, productive or workable spaces to tenants.
Stocks are investments for we could earn dividends out of their business profits. EPF is an investment as the fund generates income out of its stock and real estate holdings. That is how it pays out dividends. What about ASB? It’s an investment as ASB generates income from its stockholdings.
Bitcoin is not an investment as it doesn’t produce or create any value. You don’t earn income from holding onto Bitcoin. It is the same with holding cash. Hence, the question is: “Do we treat MYR, SGD and USD as forms of investments?”. For us, Bitcoin, like all the currencies in the world, is a currency, not an investment.
4. But Bitcoin Has Risen in Prices?
“How is that not an investment?”
You see. This is where our thinking differs.
I see investments as cash-producing engines. They're designed to regularly generate, earn, and accumulate profits. Think of them like a goose that lays golden eggs. The real value lies in owning the goose, not just the eggs it produces, since the profit comes from someone else paying more for these eggs. If your definition of investment hinges on price appreciation, then you might consider Bitcoin an investment. However, my perspective focuses on its earning potential, not just market-driven price fluctuations. By that logic, if one prioritizes speculative potential over consistent earnings, even a lottery ticket could be labeled an investment.
Put Bitcoin aside for a moment.
Personally, I have been investing for years. In those years, I do understand some level or degree of human behavior. In the context of Bitcoin, I recall two instances, when Bitcoin is most talked about.
The first period was in 2018 when Bitcoin hit US$ 20k.
The second period was in 2021 when Bitcoin hit US$ 60k.
Those were times when people were excited and got introduced to Bitcoin. Many people hoped and believed that Bitcoin will hit US$ 100k and beyond. Some are picturing themselves as the next Bitcoin-Millionaire as they hope that their tens of thousands would be turned swiftly into millions, allowing them to fire bosses and travel first class to paradises.
Bitcoin and other cryptos may belong into a new “asset class”.
But, there is nothing new to human behavior. This excitement can be found in a variety of asset classes: stocks, real estate, gold, franchised businesses and a lot more. Remember Top Glove. Remember cashback properties, which are bought with compressed loans.
You see. Nothing wrong with Top Glove or properties or Bitcoin. One big issue is always the human element. If your reason for getting into Bitcoin or in fact, into anything at all, is to make a quick buck, please don’t for you could be buying for the wrong reason. Often, the biggest losses from any investments, regardless of asset classes, is due to greed.
5. What If I Have the Bitcoin Itch?
Understandably, some of you may have an itch to speculate Bitcoin. As we have discussed, it’s human nature. If that’s you, I’ll list down key pointers so that you can get started in a safer environment.
i. Learn First.
Before committing any investment, you can read through articles, videos and webinars on Bitcoin. If you are committed to learning it, great. But if you find them to be complicated, then, it is better for you to give up the idea of speculating Bitcoin to quick riches.
ii. Go with a Regulated Broker.
The Securities Commission (SC) has listed down 5 registered digital asset exchanges that you can choose to open accounts with. These exchanges are safer for consumers as they need to comply with the strict requirements set by the SC. So, there is some protection to your Bitcoin holding in your account.
iii. Allocate Small Capital.
You may play with small money. If BTC goes up, good! But, if it goes down by >50%, then, you can write them off without hurting your day-to-day expenses. Do it with your “fun money”, not your retirement nest eggs.
In short, Bitcoin is a cryptocurrency, not an investment. It’s volatile because the value of Bitcoin is driven primarily by fear and greed: the human element. As far as I practice, investing is not so much about making money but buying time. Thus as investors, we want our money to be productive so that we can have the time and peace to spend it on what matters the most to us: our family, our community, our values, etc.
Imagine RM 300k in Bitcoin versus RM 300k in ASB.
Which one can bring you much peace and allow you to sleep at night?
With RM 300k in Bitcoin, you cannot retire with certainty as BTC can fall by 50% or more and thus, slashing the value of your holdings by half or more. However, with RM 300k in ASB, there is some level of certainty and thus, could be a more reliable asset class to build your net worth and store your wealth.
My RM18,000 profit from my bitcoin holding is just pure luck. If I viewed it as a successful investment, I could be in big trouble now.