Central Bank of Nigeria (CBN) has warned Nigerians and financial institutions to stay away from bitcoin and other digital currencies.
Experst also said that when bitcoin inevitably crashes, inexperienced investors who believed the hype could lose everything.
In Nigeria, CBN said the virtual currencies are not legal lenders in Nigeria and are unacceptable.
The bank called on financial institutions not to transact businesses in the currencies and anyone who does such, is at its own risk.
Digital currency bitcoin sold at $1000 in January 2017 and hit an all-time high of more than $19000 in December.
Currently, the price of bitcoin has been stagnated in the last two weeks and financial experts around the world continue to discourage investors.
Experts however said that Bitcoin’s price is not a reflection of its growing usage as currency; it reflects merely demand for the mirage of its speculative value.
Its price is rising only because people all over the world are hearing stories of how others doubled or tripled their money in a short period — and they don’t want to miss out. Unsophisticated investors are taking out loans to buy bitcoins. Those who have spent the currency feel remorseful when they see its price subsequently increase, so they hoard it.
Bitcoin was invented by an unknown person or group to be a digital currency. It allows money to be transferred directly between individuals using cryptography. The bank ledger is distributed to all users, and complex mathematical transactions ensure transaction integrity. Such a system makes it difficult for governments to know the identities of people exchanging money, so it has become a haven for money laundering, drug dealing, and corruption.
Beyond its usability for crime, bitcoin has major design flaws.
Bitcoins are created (or “mined”) at predetermined and gradually decreasing rates, with a total limit of 21 million issuable coins. The rate of increase in available bitcoins is not keeping pace with the number of people keen to buy them, so the price of a bitcoin keeps increasing. Because its price increases, both its “miners,” whose computers do complex calculations to earn the currency, and those who buy bitcoins from others feel reluctant to use them as currency by spending them. Instead, they sit on their coins while they wait for the price to rise further. With bitcoin supply constrained and increasingly falling short of demand, instead of functioning as a currency, bitcoin is a speculative empty asset.
Then, there are problems with the technology itself.
First, anyone who has access to a bitcoin password (or private key) has the authority to spend the bitcoins it unlocks; loss of the password means loss of all of the associated bitcoins, with no recourse. Second, linear growth in the chain of blocks that make up bitcoin is resulting in exponential growth in the computation necessary to process and verify transactions: Transactions that used to take 10 minutes now take hours. Third, with bitcoin transaction fees hovering above $25, a $5 payment now costs $30. This obviously is not a workable digital currency.
What is most worrisome for the planet is the energy expenditure that verifying transactions now requires. The bitcoin network is reportedly consuming energy at an annual rate of 32TWh — about as much as the entire nation of Denmark. Each transaction consumes 250kWh, enough energy to power an average Western home for nine days. China has become the dominant bitcoin-mining nation, with its provinces providing ultra-cheap energy to miners.
Digital currencies surely are the future, but other options make more sense than bitcoin. Take China’s WeChat Pay and Alipay, which now process $5.5 trillion of payments. Or India’s Unified Payments Interface, which makes it possible to transfer money between people within seconds — for no fee. This occurs bank to bank, provides customer support and security, and has little overhead. So there are better and simpler ways.