Bitcoin is a digital currency that uses blockchain technology. It is located in a computer network, meaning it is only accessible through a network such as the Internet.

Bitcoin is unregulated

In the event of a grievance or dispute, there is no institution to turn to as the governing body of all transactions. The lack of centralized regulation means there is no way to verify legality of purchases or trades made online.

In January 2017, Bangko Sentral ng Pilipinas stated in BSP Circular 944 that it does not endorse Bitcoin as a legal tender. However, it provided guidelines for digital currencies. Although it did not outlaw digital currencies, it remained partial to the Philippines Peso.

Digital currencies holds promise in revolutionizing the banking system. However, the system still needs to undergo major changes.

Things to consider before investing in Bitcoin

When deciding whether to invest in Bitcoin, you need to consider the fact that no single institution or individual sets the price of Bitcoin. Traders – buyers and sellers of Bitcoin set the price or value of Bitcoin.

Central banks work to stabilize values because of the pervasive effects of currency changes. Unlike the Philippines Peso, the value of Bitcoin is not prevented from rising in value or dropping in value too quickly. The Bitcoin market sets the price based on trust.

Bitcoin wild swings

In January 2009 when the Bitcoin first came out, its value was virtually nothing. It first registered value a year later at approximately USD0.003.

Bitcoin was trading at USD750 in January 2017 and rose to its historic high of USD19,780 on December 17 in the same year. That’s a wild meteoric rise of 2,537% increase in value.

Bitcoin versus PHP

Currencies, such as Bitcoin and the Philippine peso, should be stable for it to be widely used. These should have the ability to provide confidence that the money they have could purchase a set value of goods and services over long periods of time.

One way to compare stability of a currency is to compare its exchange rate with another currency. The closer the change rate is to zero, means relative stability of the currency. Conversely, the farther the change rate to zero, means more volatility.

Let us compare the exchange rate of the Philippine peso and Bitcoin against the US dollar.

In the past five years, from December 2015 to December 2020, the change in value of the peso against the US dollar is -0.96% of -1%. Bitcoin, in the same period had a change rate of approximately 4,526%!

Stability of Bitcoin versus Philippine peso

Let’s dig a little deeper and check the change on annual basis for the same five year period. The table below shows the actual exchange rate of the peso and Bitcoin to the US dollar in the past five years on an annual basis.

The table below summarizes the change rate of the peso and Bitcoin against the US dollar on an annual basis in the past five years. It clearly shows that the Philippine peso is far less volatile and is a far more stable currency compared to Bitcoin.

Taking a look at the annual change rates of the two currencies, it is easy to see the stability of the fiat money compared to Bitcoin. Investors are more certain of the value of the Philippine Peso compared to the value of Bitcoin. Bitcoin is similar to a rollercoaster gone mad in its volatility.

Currencies should be stable

Because Bitcoin is so volatile, it promises high growth but it also poses the danger of slumping to extremely low values. For the typical person on the street, there is a need to be certain that the value of their money is retained throughout the years.

Furthermore, there is no certainty in how much an investor will receive from Bitcoin. Based on past data, an investor trading $1,000 into Philippine Pesos will receive between PhP45,000 and PhP50,000 in the next year. However, Bitcoin has no such certainty. On November 24, 2020, it was valued at PhP924,000. Two days later, it was valued at PhP821,000.

The certainty of fiat money can be projected into years whereas the volatility of digital currency means that days and even weeks can yield wildly different valuations. This makes it difficult to use Bitcoin for business and is part of the reason it has not been adopted into mainstream exchanges. Fiat money is more stable and predictable.

Bitcoin versus PSEI

The Bitcoin market is actually even more volatile than the stock market. Given Sir Vince’s strict guidelines for investing in the stock market, he poses even stricter guidelines for investing in Bitcoin.

The table below shows the volatility of the Philippine Stock Exchange Index (PSEI) with Bitcoin and the Philippine peso.

Bitcoin is not an investment

Bitcoin should not be considered an investment. Rather, treat it as a currency or a medium of exchange. If you base your investments on the possibility of large payouts due to extreme volatility, you are engaging in speculation.

Speculation is not a valid investment strategy because it is considered as gambling.