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Cryptocurrency has been making news headlines of late thanks to the soaring prices of Bitcoin.
It was reported that a single bitcoin which just cost US$0.003 seven years ago has now soared to more than US$2500 per bitcoin.
Back then, 10,000 bitcoins was only able to buy two pizzas, which was the exact purchase of Laszlo Hanyecz, a programmer. How times have changed.
Although the most well-known cryptocurrency at the moment is Bitcoin, there are plenty of other alternatives to Bitcoin such as Ripple and Litecoin.
But what exactly are bitcoins and cryptocurrencies?
Bitcoin Malaysia Explains What Cryptocurrency Is All About
In short, bitcoins and cryptocurrencies are a digital currency that is decentralised, which means that it is not regulated by any government or monetary authority and it is not under any one country.
And nobody initially thought that Bitcoin will take off like it has now.
“Initially, the price of a bitcoin was below RM10, if I’m not mistaken, but when a few countries start recognising bitcoin and people become more aware of it, the price of bitcoins start to grow really fast because of increasing demand,” Ragunathan, Bitcoin consultant for Bitcoin Malaysia told Malaysian Digest.
Compared to last year, more countries are also starting to recognise blockchain technology on top of cryptocurrency.
“When they start to recognise blockchain and bitcoin, most countries will start to adopt blockchain technology and people will start buying bitcoins, causing its price to rise until today,” he said.
Blockchain technology, according to Ragunathan, is a bitcoin verification mechanism to verify the cryptocurreny transaction.
“When I send one bitcoin to you, the blockchain will verify the transaction to ensure that it is a genuine account.
“So to hold the bitcoin, it needs a bitcoin wallet to send or receive bitcoin,” he explained.
At the moment, Ragunathan estimates that around 100,000 people in Malaysia are involved in bitcoin and the interest is growing.
Despite the growing interest, the environment for bitcoin usage in Malaysia is not as vibrant like other countries such as the US and Singapore as Ragunathan said there are a few merchants that accept bitcoin for their business but he sees the ecosystem developing in the next five years or so.
However, there is a big hurdle that they need to overcome which is getting the Central Bank (BNM) to recognise Bitcoin as a legal tender in Malaysia.
Back in 2014, BNM issued a statement where they stated that they do not regulate the operations of Bitcoin traders and advised the public to be cautious of the risks associated with the usage of such digital currency.
“But I think they notice that a lot of banks are trying to understand the blockchain technology.
“I think they are trying to understand, get feedback so I think they are in the process of reviewing the blockchain technology itself but we don’t know when they will legitimise it,” Ragunathan said.
However, Bitcoin is not without its risks as it is not backed by anything but only depend on the market request, which is why its value is so volatile.
“The price is volatile because it depends on demand and market request, and I do not see the price crashing because the demand is there.
“I can also say that the price is going up unless someone messes up, then the price can crash but it will not affect it too much and it will go up again,” he confided.
Seeing that everything is online, it can raise a few concerns of whether our money can be stolen due to hacking.
At this juncture, Ragunathan said that the onus is on the investor to ensure that their gadgets or system has security and safety features so that no one can hack into their system and get all of their information.
Before we ended our interview, Ragunathan, who is looking forward to the changes in the environment in Malaysia soon, advised newbies to Bitcoin to do their research first before investing their money in bitcoins.
“Those who are new to bitcoin need to understand what it is first.
“Some people don’t know anything about bitcoin and invest in it because they see the price is going up. Don’t do this.
“Understand how it works first before buying it as there is no point if you don’t know how everything works,” he advised.
Although Bitcoin is attracting a lot of attention, the question of whether it is halal (permissible) or not will eventually be raised among Muslim investors and it will be a factor in determining whether they would invest in it or not.
At the moment, Dr Muhammad Irwan Ariffin, assistant professor at the Kulliyyah of Economics and Management Science of International Islamic University Malaysia (UIA), said that discussions between Muslim scholars have yet to produce a proper agreement regarding bitcoins as many factors still need to be addressed such as the misuse of bitcoins, and issues regarding enforcement and regulation.
“Currently there is no clear ruling on bitcoins because something that is originally halal can be haram (prohibited) because of external factors.
“What I found so far from my readings is that scholars usually give their opinion but they will always attach the conditions or situations where it becomes makruh (unfavourable) or haram.
“I think many of them originally say it is halal but because of additional elements like uncertainties, and the absence of a judiciary authority to regulate foul conduct, they become reluctant to say so.
“If these can be improved, maybe they will be willing to proclaim that it is halal,” he said.
Despite the unclear ruling regarding bitcoins, Dr Irwan is of the opinion that bitcoins can be considered as money from the Islamic perspective even though it does not have a physical or tangible representation.
“Different scholars might have different views but I am content with our classical scholars’ view which says that it depends on the public confidence, where anything can be considered as money as long as the public accepts it as a medium of exchange,” he opined.
Expanding on this notion, Dr Irwan said that anything valuable can be considered money such as labour service.
“Labour service is intangible but is valuable and considered a medium of exchange because the government accepts payment in this form, especially in the past where labour service is used as a tax payment to the government,” he explained.
As money is considered under muamalat, which deals with our daily activities that is not purely in regards to our relationship with God, Dr Irwan said that the legal maxim in Islam states that everything is permissible unless there is a clear evidence either in the Quran or the Sunnah (traditions of the Prophet) that says that something like bitcoin is haram.
“Since there is no prohibition or evidence that bitcoin is haram – obviously since it is something new - then it is allowed.
“But then we need to check other contents such as how it is used and this may lead it to become unfavourable, not because of its own nature but because of external factors such as misuse,” he said.
Dr Irwan also noted that some authors highlighted that bitcoins are more Islamic than fiat money (paper currency) because it is not exposed to the fractional reserve system, which is a common feature in a fiat money system.
“In a fractional reserve system, the bank can lend more than the amount deposited under fiat money and because banks have this required reserve, they have to make sure that at least 20% of the deposited money is still there in the bank,” he said.
To illustrate, Dr Irwan said that a bank can lend out RM900 from RM100 that has been deposited by a customer.
“So the bank lends out RM80 to another customer and that customer might deposit the money into another bank.
“That bank then keeps 20% of the deposit and lend out 80% from the RM80 and this cycle will continue.
“Overall, the system will create a lot of money from a simple deposit and this is why the fiat system is not really favourable among the Muslim scholars,” he said.
This system cannot be done using bitcoins because the amount of money put into our electronic wallet has to be the amount that needs to be there.
“You cannot simply lend out more than what you have because there’s no one that controls the creation of bitcoins, so this is the advantage from this point of view where we can make sure we don’t have an oversupply of money like what we have right now from the fractional reserve system,” he explained.
However, Dr Irwan disagrees with the claim that bitcoins are more halal than fiat money because it is free from riba’ (usury).
“In my view, riba’ does not depend on the nature of the currency but on how you use it.
“Fiat money in its element itself does not contain riba';for example, when you lend your money to your family, you would not ask for interest in return so there is no riba’ involved.
“The same thing applies to bitcoins. If I lend a bitcoin to my friend and I ask him to pay back more because time, money, inflation or whatever reason, then that is riba’ in Islam.
“And this is the same for any currency in the world regardless if it is fiat or dinar,” he concluded.
Ahmad Fawwaz Mohd Nasaruddin, another lecturer at the Kulliyyah of Economics and Management Science of UIA, doubts that Bitcoin will be leading the pack after the limit of 21 million is reached and it has been reported that 80% of bitcoins will be mined by January 2018.
“For example, we used to use Friendster and MySpace, we thought that it would be the prominent social media site.
“So my idea here is that maybe people will forget about Bitcoin and something else will replace it because the way technology is today, the chances of having this medium is very big and this trend will continue in the future,” he said.
Although not all countries accept bitcoin, Japan is among those that do and they even accept it in grocery stores, so Fawwaz said that there is a very high chance of developed countries to start using bitcoin in their daily transactions.
Despite the chance of cryptocurrencies gaining prominence, Fawwaz warned against investing in it if the purpose is to generate more wealth.
“If they are looking to enhance their money and grow their wealth, cryptocurrency could be one of the way but it is a highly risky investment style because it is very much volatile.
“Investing in cryptocurrency can be an alternative but it is very risky,” he said.
As with any other types of investment, research needs to be done to really understand what we are pouring our money into, especially for high-risk investments like Bitcoin.
For Suraya, the individual behind personal finance blog Ringgitohringgit.com, months of research was done before buying a small amount of bitcoin to start her portfolio before gradually adding more to it.
“I've followed financial news for years, including other investment vehicles.
“I decided to add bitcoin (and altcoins) investment into my portfolio based on my own understanding on the global financial ecosystem and its trends,” Suraya shared.
However, bitcoin is not her main investment portfolio and she only invests in it using money she can afford to lose.
“I invest in bitcoin with money I can afford to lose. It is definitely a high-risk investment. I try not to worry about it - it helps that I have other safe investments to balance it out.," Suraya advised.
Suraya also advised those who are new to bitcoin and crytocurrency to be extremely tech savvy, especially relating to blockchain technology and digital security and be aware that it is an unregulated industry.
“I do think that safer investment vehicles should be people's priority first before diversifying into cryptocurrencies,” she concluded.
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