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Bitcoin and Digital Assets: Asking the hard questions

By Lord Peter Hain

Quite possibly I’m what Americans call an ‘average Joe’ on Bitcoin: pretty suspicious of something I’m not sure I fully understand, and aware that financial criminals are well into it – but also conscious that a crypto currency in a digital world may well be a logical next step, with digital money movements already having replaced lots of cheques and cash.

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Bitcoin enjoyed a mesmerising surge of about 1,000% over the past year, more than quadrupling in value and outstripping stocks and gold, with Tesla’s $1.5bn Bitcoin purchase making headlines and many investors desperate to get-rich-quick in a world of uniquely low interest rates. 

Critics poo-pooed all this as a speculative bubble.  And the UK’s financial watchdog issued a stark warning in early March 2021 for any ‘average Joes’ like me looking to profit from Bitcoin: be ready to lose everything!

It may be of course that all money changing becomes digital in the end.  Millennia ago it happened through bartering.  Then progressed via metal items of exchange into currencies based on physical notes and coins.  Followed by cheques and telex transfers, then interbank electronic exchanges. Now personal banking via Apps on mobile phones is widespread. 

In 2016 I was startled to witness in a Kampala open-air market impoverished women paying for bananas and vegetables on their mobile phones; stall holders standing in the dust were happy to accept money that way.  And of course money exchange via mobile phone is now widespread in Africa, as well as elsewhere.

Meanwhile more cryptocurrency trading goes on in Nigeria than almost anywhere else in the world, reflecting a loss of faith in more traditional forms of investment.  Of the top 10 countries trading cryptocurrency volumes, Nigeria ranked third after the US and Russia in 2020, generating more than $400m worth of transactions.

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Of the top 10 countries trading cryptocurrency volumes, Nigeria ranked third after the US and Russia in 2020, generating more than $400m worth of transactions.

However many Nigerians have reported that their bank accounts have been frozen due to cryptocurrency-related activity.

But pause and ask a few hard questions. Bitcoin transactions generally happen on a bitcoin exchange rather than being used by people buying or selling stuff (or at least legal stuff). 

Consequently almost nobody in the UK FTSE or on the US Dow stock exchanges ever uses it. Though criminals and money launderers obviously do so – and quite extensively. But because Bitcoin is not regulated by a central authority, no one can entirely track it.

It is too volatile for any normal transactional use. That is why a number of banks, though tempted, have pretty much all closed down bitcoin accounts. But there may be uses which attract big players like Elon Musk who take futures positions on commodities. 

Imagine you are a UK oil company and want to buy US oil. It is traded in US dollars. If you buy the USDs with GBP just when you need them, you will have to buy at the spot price. But if you know you will need USD in, say, 3 months, you may conclude you could buy them in advance if you think the USD will go up compared with the GBP and you will be in the money on the day you have to pay for the oil, so making for a more profitable transaction. 

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If on the other hand you think the USD will go down, you can enter a contract to buy USD at a future date when you think they will be cheaper and you will again add to the profit of the original oil trade. In short, what is known by the aficionados as ‘a futures play’. 

An expert friend who knows about all this tells me: ‘With the purchase of derivatives, you could even get some insurance protection against things going badly wrong. Bitcoin can work the same way. If you think it will simply go up and up, and you want to use it to transact – to buy say steel or rubber or the component metals of batteries – by buying a finite number of US dollars today, it may mean you have increased the value by twice when you actually have to pay for the stuff.  But remember that would only work for you if you can sell the Bitcoin when you need to.’

Meanwhile billions across the world aren’t tech savvy enough to master any digital transfers, and a good number of them cannot afford mobile phone and online service charges, including over 5 million, mostly older, Britons.  So I worry about the disappearance of cash, especially following the closure of local bank branches and cashpoint machines in the UK and elsewhere. 

As for Bitcoin, ‘wait and see’ is my personal motto.  Which may mean I lose out on the opportunity of a lifetime.  But at least it will stop me having nightmares about losing everything.  

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I am not a gambler.  But for those who are, be my guest about Bitcoin.

– Lord Peter Hain, former anti-apartheid leader and British Cabinet Minister. Current Chair of IC Intelligence.

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