Table of Contents
1. Introduction
Through the last few months, Bitcoin has been one of the most interesting subjects. With its massive Wikipedia article, the page has seen it all. With a recent surge in edits and new articles, we aim to better consolidate information regarding Bitcoin and its use. Coinciding this effort with the ability to make a Bitcoin donation, now is the best time to do this. Bitcoin is a digital currency used to purchase various goods and services. For the laymen, it is easier to understand Bitcoin as something akin to a type of PayPal or an online credit card. These are the types of digital money that most people are already used to. The distinction is that PayPal and credit cards are tied to specific consumers, while a Bitcoin acts like cash. Strictly speaking, Bitcoin is a digital asset with verified transactions secured by strong cryptography, in a peer-to-peer network that is totally decentralized. At its most basic level, Bitcoin is a collection of concepts and technologies that form the basis of a digital money ecosystem. The unit of currency is referred to as a bitcoin with a lowercase ‘b’. This is to represent a unit of currency as opposed to the whole system itself. Like the internet is a system for communicating data, Bitcoin is a system for communicating value. Step one is to ‘setup a wallet’. This is software that can communicate with the Bitcoin network.
1.1 Overview of Bitcoin
The general idea of Bitcoin is a form of digital currency, which was created and is held electronically. No one controls it. Bitcoins aren’t printed, like dollars or euros – they’re produced by people, and increasingly businesses, running computers all around the world, using software that solves mathematical problems. It’s the first example of a growing category of money known as cryptocurrency. The first and most famous global cryptocurrency is bitcoin, which appeared in 2009. Bitcoin serves as a decentralized medium of digital exchange, with transactions verified and recorded in a public distributed ledger (the blockchain) without the need for a trusted, central authority. Bitcoin supply is limited to 21 million, with the rate at which new tokens are introduced prescribed by the network protocol. This limited supply has contributed to the perception of bitcoin as digital gold and a hedge against inflation amidst the global COVID-19 pandemic, despite the strong growth in its adoption as an accepted means of payment in the mainstream economy. Bitcoin price history is a focus of some current investors. Bitcoin price data has been recorded ever since bitcoin was first mined. There are many places where you can find the bitcoin price data. A quick Google search will give you an idea of where you can buy it at the current time. At the time of early 2017, data showed that the price was higher than the price of gold. This may fluctuate depending on the current market climate. From the beginning, miners from all around the world have mined for various reasons. While some miners do it for competition in order to gain ample amounts of return, some do it simply for a more decentralized and democratic future.
1.2 Importance of Bitcoin Investment
Bitcoin is viewed as a good investment opportunity for many. According to research conducted in 2019, around 7% of Americans have Bitcoin in their investment portfolio. Reasons to add Bitcoin investment to the portfolio are vastly different. Contrary to traditional investment, Bitcoin is characterized by a steep price increase and decline, with investors often failing to foresee the potential risks. With more attention being given to Bitcoin by start-ups and Venture Capital firms, its industry moves onto being normalized with traditional currency. Investment has begun to shift from getting involved with the currency just because to make high profit margins, to securing a portion of Bitcoins in the aim of utilizing the currency when it’s accustomed in daily transactions. These investors believe that the value of Bitcoin will increase steadily with a decrease in volatility. This sounds familiar to how trading Forex or Stocks would, but an issue with Bitcoin is that it’s a global currency which has yet to be sustained by economies around the world. This brings various unforeseen and potentially detrimental impacts. An example of this would be the increase in value of Bitcoin which was closely associated with the confiscation of bank funds in Cyprus upon the 2012-2013 financial crisis. Many Cyprus residents and companies sought to secure their wealth from the Banks and Government, purchasing Bitcoin which had the reverse effect of decreasing the currency value due to potential sell-off to return the funds.
2. Countries Investing in Bitcoin
The primary reason China is the next major Bitcoin investing hub is because of its relative position to Bitcoin and recent changes in government policy. While China is the world leader in Bitcoin mining, the majority of Chinese have been using Bitcoin as a form of investment rather than as a tradeable currency. This is contrary to popular belief, as exemplified by the increase of yuan-bitcoin trading pairs on multiple Chinese exchanges. This year, however, the Chinese government has enacted policies to magically decrease the devaluation of the yuan, specifically through capital controls and Forex sales. This has resulted in a blanket halt of zero-fee trading on Chinese Bitcoin exchanges and P2P margin lending, causing both to become less lucrative and there to be less activity in the Chinese Bitcoin space. It is entirely plausible that this policy will shift more Chinese to trade Bitcoin as a way to evade the yuan’s devaluation, and with closing off other profitable alternatives in China, we could see Bitcoin as being the main method for Chinese to store wealth offshore or to invest in a decentralized asset.
China
The most fundamental reason behind the US being the top investing country in Bitcoin is that the majority of Bitcoin transactions are done in USD. Cryptocurrency is poised to revolutionize the way people transact, and very soon a solution to its scalability issues will be unearthed. Cryptocurrencies will be the primary method of P2P transactions, and there is no country more connected, economically liberal, and influential as the United States. Imagine Bitcoin as the currency of the internet, and the United States as the world’s largest internet service provider, the two are inseparable. In the short term, an ETF proposal by the Winklevoss Twins will decide whether the US will be the main driver of the next Bitcoin rally. If the ETF is approved, it is likely that the United States will play an even bigger role in the Bitcoin world.
United States
2.1 United States
Cryptocurrencies, especially Bitcoin, have at long last discovered a spot for themselves in economic forms all over the world. The study verifies the relationship between finance and technology. The investigation is aimed to discover a significant relationship between investment in Bitcoin and economic indicator (GDP per capita) as finance involves technology in its background. After specifying, technology isn’t only about manufacturing base products and focused levels but also related to financial investment. Bitcoin is a global cryptocurrency and digital payment system which has been made legal tender by warrant of law in few countries and is still being in trial and error phase in some countries. It is well decentralized and doesn’t have any central authority, thus depends on the level of public involvement towards it. The investment in Bitcoin is a new realm compared to its other previous investments such as bonds, stock, or other commodities step-ups. Hence, it is important to relate what kind of investment in Bitcoin towards a country. Since Bitcoin has few attributions to relating investment, this study uses GDP per capita as an indicator. The United States, as a pioneer of technology, is also an adopter to invest in Bitcoin. In a nutshell, it has a conditional relationship between financial investment and the level of technology. It is expected that a higher level of technology has a higher financial investment.
2.2 China
China is one of the biggest markets and sources of Bitcoin, and most people know how China controls the Bitcoin price. Critical analysis on the reasons behind China’s investment trend on Bitcoin, evaluation of China’s Bitcoin trading fees and regulations over these years, and comparison of the Bitcoin investment trend in China with those in the US and Japan will be done in this chapter. High trading fees and price fluctuation are among the most significant reasons why China is the biggest market for Bitcoin. China has no lack of Bitcoin exchanges, and most of them have significantly high trading fees compared to other USD exchanges. Many Chinese are finding ways to bypass these fees to trade Bitcoin and exchange it as a remittance method to get more value out of their money in view of price fluctuation. During the period where the price of Bitcoin is very unstable, it’s a good chance for people to earn money through trading due to the price fluctuation as the bear and bull cycle in Bitcoin can decrease or increase the price of Bitcoin in just a day. While some gain profit through capital gain and speculate on Bitcoin, there’s a big group of people doing it as a remittance method. Due to the unpleasing performance of CNY and strict regulations in money transfer, some Chinese are using Bitcoin to transfer their Chinese Yuan overseas in view of changing it to another currency and changing it back to CNY to get a better rate. With that being said, Bitcoin is considered a foreign currency or an asset to some people who are exchanging money for remittance, and since Bitcoin is treated as a foreign currency and there are no rules or regulations on Bitcoin, they will not be worried about money being seized or monitoring from their banks. High trading fees have somewhat discouraged potential traders and remittance users, and they will look for alternatives such as trading in other countries’ exchanges and changing it to USD before changing it back to CNY. With the main intention of escaping CNY’s depreciation, capital and remittance users’ attention will be drawn to trading between USD and CNY to earn more value in view of CNY’s loss, which is related to the comparison of Bitcoin investment between China and the US. In a nutshell, China’s investment trend on Bitcoin is considered both an investment and a tool to earn money or value from remittance. But the most significant reason for investment is still the sole purpose of earning a profit from speculation and price fluctuation in view of vast Bitcoin price changes.
2.3 Japan
The amendment is a response to the AML requirement A-22 of FATF. The Japanese Virtual Currency Exchange will now be a new form of fund transfer business known as ‘fund handling business’ that requires registration. Additionally, within this act, there is a change of the term “virtual currency trading business” to “virtual currency exchange” and will now include custodial business. These exchanges are now subject to both the act and the Act on the Prevention of Consumer Endangerment. This legislation provides necessary provisions in each act to clarify the treatment of customer virtual currency assets. This security will change Japan’s previous global stand on virtual currency from the MtGox incident that led to the collapse of the world’s largest bitcoin exchange.
Two important steps have been carried out by the Japanese government. The first is recognizing bitcoin as having a legal status as a method of payment (Treatments for the consumption tax that can be postponed to a future date will be clarified) and preparing the amendments to the relevant legislation and regulations during the ordinary Diet session. On April 1, 2017, the Japanese government has amendments to an Act on Preventing of Transfer of Criminal Proceeds. This act changes to the term usage ‘Virtual Currency’.
Japan has had a very short time within the day of reckoning. This movement is not entirely based on the demand of the Japanese population, but as a result of the EUA 2015 Value Added Tax (VAT) exemption, bitcoin and cryptocurrency in Japan seems to have a price of ‘0’ which means it is not subject to VAT.
2.4 Germany
In 2018, Germany recognised Bitcoin as a legal tender and now treats it in the same way it does foreign currencies. This has significant effects on both VAT and Capital Gains tax. In terms of VAT, when Bitcoin is exchanged for a good or service it is treated the same as if a EUR was exchanged and so will be subject to VAT. However, as with other currencies, when Bitcoin is used as a means of payment for services – which would also include using Bitcoin to purchase other goods or other cryptocurrencies – it is exempt from VAT. Capital Gains tax comes into play when an asset has been held for longer than a year before being sold or traded. In such cases the profits made are not subject to income tax and only become tax exempt if the total profit for the year is less than 600 EUR. Various laws preside over the taxation of Bitcoin in Germany and for expatriates this can be a big plus. Germany, like the US, taxes Bitcoin as an asset and in certain situations it can be taxed at more than 25%. An exception to this exists as §6 (1) 3 EStG states, that if a private sale only consists of a Bitcoin transaction, the Bitcoin holder is exempt from taxation if the minimal required holding period of one year is met. This means no income tax has to be paid on profits made from virtual currency providing they are not massive enough to put the taxpayer into a higher income bracket. Taxation of Crypto Currencies and Tokens from what is known as the ‘Hard Fork’ rule can be found in §23 EStG. This states that those in ownership of cryptocurrency at the time of a hard fork will be seen as the owner of a new private key. The legislation is considered relatively complex, but taking advice from an expert in cryptocurrency tax law can often work out beneficial compared to many other countries.
3. Factors Influencing Bitcoin Investment
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As stated by Yelowitz (2015), the biggest concern for potential digital money investors is the influence of government regulation on cryptocurrency. Findings from this study suggest that when Bitcoin was recognized as a form of currency, some countries imposed indirect tax on Bitcoin acquisitions, which had a slight negative impact on Bitcoin investor numbers in quarter 2 and 3 of 2014. However, in a study by Foley, Karlsen, and Putniņš (2019), it was discovered that legal recognition of virtual money is a more important factor than a tax obligation on a specific financial transaction. The implied probability of investing in Bitcoin increases by between 5.6 and 10.9 percentage points if a country progresses from recognizing no legal tender law to recognizing it at the federal level. This suggests that there is a tipping point in virtual money recognition, where if a cryptocurrency is perceived as a legal form of money, it can potentially attract a large amount of investor interest.
3.1 Regulatory Environment
The international nature of Bitcoin will make it especially difficult to effect a change in the exchange rate that brings about a desired change in demand in one country. Suppose, for example, that the US government develops a policy to raise the price of Bitcoin in terms of dollars with the aim of reducing demand for Bitcoin in US transactions. The policy options that suggest themselves are intervention in the foreign exchange market or the imposition of a tax on individual Bitcoin holdings. Yet, the exchange rate is determined in the global market. Any policy that raises the rate in US markets will tend to attract speculative demand from other countries, for expected profit is determined by global price expectations. A Bitcoin user considering intervention in exchange markets is quite limited due to the small volume of foreign exchange trading. The difficulty of coordinating national government policy in the face of a global determination of Bitcoin price suggests that demand management of this type should be regarded as a robustly unattainable task.
A common concern about the Bitcoin system is the large degree to which demand growth or contraction affects the exchange rate. Unlike fiat currencies whose money supplies are given by monetary policy, the market price of foreign currency, and interest rates, the demand for Bitcoin is a complex function of utility derived from ownership, speculative expectations on future prices, and the desire to use it in transactions.
3.2 Economic Stability
Economic instability, on the other hand, is a situation where the country is going through a tough time. High levels of unemployment are faced by the nation and inflation rate is really high. Government policies keep changing every now and then and it’s a bad time for investment. People would fear losing their money due to high inflation and hence the public would prefer to save their money in form of cash. They would not want to spend on a currency like bitcoins and risk it all to lose it. This would also reflect to capital flight as the domestic investors and companies would invest their money in some other country. This is an indication of loss of investment for a country and it can be reflected by negative net capital outflow. The worst case of capital flight is when people start converting the domestic currency to a relatively stable foreign currency and in extreme cases to a commodity like gold. All these situations work out to deteriorate the economic condition of the country and reduce foreign investment. For bitcoins, it would be hard to be a preference for the people in the countries having these economic conditions.
Economic stability is laid down by positive economic indicators about the structure of the economy. It is an indication of positive economic health of a country. Lower inflation rate and lower volatility in the forex exchange rate, which in turn works out to provide a greater opportunity for investment in bitcoins. Economic decisions are made for the betterment of the society as a whole. It’s a combination of various policies which work out to provide a better economic path. This can be reflected by better credit rating of a country and lower debt to GDP ratio. All these economic indicators about stability of the economy will provide a greater incentive for investment in bitcoins.
3.3 Technological Infrastructure
Focusing on the relationship between a country’s technological infrastructure and its degree of Bitcoin investment, we argue that more technologically advanced countries are experiencing much higher levels of digital currency investment. The reason for this is simple: residents of these countries are already comfortable using digital payment systems in their day-to-day lives and are generally more trusting of government economic policy. According to our infographic, the countries with the highest ‘technology’ score (which we have crudely calculated by averaging a country’s e-readiness ranking and e-government ranking) are also experiencing the highest levels of Bitcoin investment. These countries include Singapore, the Scandinavian nations, the UK, the US, Australia, New Zealand, and various East Asian nations. Assuming that technological infrastructure is unlikely to decrease and will continue to improve at varying rates across the globe during the next 5-10 years, we expect the positive correlation between technology score and Bitcoin investment to remain more or less consistent.
4. Future Outlook
It is an empirical question what the net value of Bitcoin will be in 10-15 years’ time. On a speculative isolated demand was mentioned earlier, that there is a possibility the future value of bitcoin will increase to become the single reserve or parallel reserve currency of the world, but this looks impossible since the restrictions that would occur on any form of capital flight involving national currency to bitcoin. A less optimistic but more realistic scenario is a sizeable net value, but the virtual isolation of bitcoin to special drawing rights and a limited class of financial assets. This is because the level of usage for normal types of transactions is a flow, and so long as net demand is positive, the real value of bitcoin will not stabilize until it approaches its limit. The final scenario is a collapse in the value of Bitcoin as a coordinated event where people realize there is little probability of it becoming a long-lasting currency and thus people will try to minimize their capital losses. Step functions on the net demand and a series of speculation of different timescales can be regarded as a discrete path to the final scenario, although there are infinite variations depending on changes in demand.
Looking into the future, the value of bitcoin is a subject of much discussion. The highest ever value of Bitcoin till date is $19,830, it has generated much wealth in the past eight years. However, with only 16.4 million bitcoins in circulation, and the maximum limit set at 21 million bitcoins, the value of a bitcoin is set to increase as the scarcity of the cryptocurrency increases if demand remains constant. The ideal scenario would be the increasing value of Bitcoin as a store of value, as well as increased adoption as a medium of exchange and a unit of account.
4.1 Growth Potential of Bitcoin Investment
“Your can make a better speculation or a worse speculation and I think there are circumstances under some of the worse case ones, it’s basically a free option.” Dr. Saifedean Ammous (2018) summarized the growth potential of bitcoin investment as essentially a free option. In his widely published book “The Bitcoin Standard,” Ammous outlined the “low time preference” economic theory which explains how the shiftless value of money will likely lead entrepreneurs, investors, and consumers to favor production and investment over consumption for future gain and a more efficient store of value. Bitcoin represents a speculation that it will be a superior money in the future, thus if bitcoin adoption and use grows, the value of bitcoin will increase compared to current demand. If this speculation fails, there is no opportunity cost as there is no better future use for the money spent on bitcoin, and those more optimistic about Bitcoin’s future can leave room for an “excellent speculation” with the potential to purchase more bitcoin at a lower exchange rate.
Pfeffer (2018) has put forth one of the most bullish investment theses for Bitcoin to date. He shared his view that bitcoin could be a major disruptive force for finance during a presentation he gave at the Salt Conference in 2018. Pfeffer outlined a future price point of $90,000 to $700,000 USD per bitcoin, stating that this range would put the market cap for Bitcoin at $1.5 trillion to $10 trillion USD. He compared this valuation of Bitcoin at some point between 2018 and 2028 to the market cap of gold at $7 trillion USD. Pfeffer added, “there are a number of structural features of Bitcoin that are quite attractive to those that are skeptical of fiat currency.” Pfeffer’s analysis is based on a comparison of qualities which give Bitcoin relative advantage compared to traditional financial systems and stores of value.
Analysis of the Bitcoin investment market to date mostly supports a balanced consideration of potential and risk. Proponents of Bitcoin point to various factors that make it a potentially high-yield investment. However, skeptics warn against a speculative “bitcoin bubble,” likening the Bitcoin phenomena to the tulip mania of 17th century Holland or the more recent dot-com bubble. Knowledge of these two historic instances provides a good framework from which to compare the potential for investment growth to the potential for loss.
4.2 Challenges and Risks
Challenges to Bitcoin being worth a high investment are based around its relative newness and the unknown worth during tough economic times. This is clear to see when we examine the current global economic climate with the concern for a double dip recession. People are very reluctant to spend any spare money when they know full well that they may require it further down the line and therefore this has an adverse effect on investment assets. While gold or silver are deemed to be safe investments during tough times, Bitcoin may struggle for people to take it seriously as an investment for some time, and could even be viewed as too risky. Any bad global news or change in economic situation can bring repeated questions on the sustainability of Bitcoin. An investigative journalist could unknowingly undermine Bitcoin by writing a negative article with an opinion that Bitcoin has no ‘real’ worth and is a futile investment, or compared to a previous economic crash or lower socio-economic trend within a specific country, they may ask if and why Bitcoin lost value at that time.
The increase in awareness of Bitcoin as an investment could be attributed to its phenomenal performance in recent years. In an attempt to read the future worth of Bitcoin as an investment, I stumbled upon various scenarios which could cause change to the current upward trend in worth. Any investor seeking to invest in Bitcoin must not only be prepared for good results but should also be prepared for bad results, and understand the various ways that Bitcoin could potentially be undermined. This next section highlights the expected future challenges and risks when it comes to Bitcoin investment.
