More apt to compare bitcoin with gold, silver

Senior Correspondent Goh Eng Yeow is right in saying that bitcoin is not backed by any specific government or central bank (What is fuelling bitcoin's astounding gains?; Sept 4).

However, instead of comparing bitcoin with currencies backed by governments, perhaps it would be more apt to compare bitcoin with gold or silver, which can function as currency and, yet, are ubiquitous and no single country or government can claim to have a special monopoly over them.

Therein also lies the attraction for some investors; they see bitcoin as a hedge against currency risk.

For instance, in Venezuela, which is experiencing some of the worst hyperinflation ever seen in modern times, a few turned to bitcoin as a hedge against currency degradation and, in so doing, have been able to continue making purchases of medicine and other essential items which have become otherwise unaffordable.

Every asset has its boom-and-bust cycles, and bitcoin is no different, with panic selling followed by bouts of maniacal buying.

Savvy investors, however, do not follow the herd into maniacal buying; they buy when the price of bitcoin has "crashed", and when, in trader-speak, there's blood in the streets.

And when the price of bitcoin shoots up too much or too quickly, savvy investors exchange their bitcoin for other cryptocurrencies (that could be next in line for an upmove in price), or for cash.

Mr Goh is also correct in asserting that, in the case of a currency backed by a government, the central bank can help organise a bailout or act as a "lender of last resort" in times of economic crisis.

While it is true that bitcoin does not have the same sort of protection, it should be pointed out that bailouts are reserved only for crises - they do not protect investors from losses incurred during day-to-day trading.

Chan Yeow Chuan

A version of this article appeared in the print edition of The Straits Times on September 05, 2017, with the headline 'More apt to compare bitcoin with gold, silver'. Print Edition | Subscribe