The Bitcoin bubble may soon burst

Dr. Ali Al-Ghamdi
Dr. Ali Al-Ghamdi
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There has been a lot of talk about the digital currency Bitcoin with calls to invest in it along with claims about the high return that investors have already received.

Bitcoin, an electronic virtual currency, is not issued by the central bank of any country and has no reserve or financial authority to ensure its value as well as to regulate transactions so that customers can approach these authorities in the event of any malpractice.

Dr. Abdullah Dahlan, an economic columnist, wrote recently in Okaz newspaper about this new currency. After analyzing the profits that could be earned and the elevated risk and volatility involved, he warned against falling into the trap of those who are promoting this currency system.

Dr. Dahlan said that Bitcoin, which emerged in 2009, was designed by an anonymous person who calls himself Satoshi Nakamoto. It is the first encrypted currency traded completely through the Internet without the presence of a centralized regulatory body for its supervision. It is a virtual currency that operates according to a decentralized system where the exchange of the currency between two parties is carried out without an intermediary.

There should be an intensified campaign to highlight the fact that this currency is like a bubble that may burst at any moment and those who invest in it will find that that they have lost everything

Dr. Ali Al-Ghamdi

Peer-to-peer payment system

This process is based on a peer-to-peer payment system that does not have any transfer fee or other related expenses. It can be used for online purchases and sales. It is also possible to exchange it for other currencies in some European countries and receive money in standard currencies, such as the dollar, yen, and sterling.

Dr. Dahlan noted that ever since it was first issued, there has been a surge in transactions day by day, and he attributed this mainly to the lack of financial controls and geographical restrictions and the absence of any financial intermediary. Moreover, the circulation of the virtual currency has received a shot in the arm due to the spreading of rumors that some countries have adopted it as a legal currency.

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Dahlan added: “It is my duty as an economist, who follows the projections of international financial analysts, to warn citizens against becoming involved and dealing in this currency, in view of the fact that most economic projections warn of a possible sudden collapse of the currency after witnessing a significant increase in its circulation. The Saudi Arabian Monetary Agency (SAMA) is keen to ensure the safety of financial and banking transactions in the Kingdom.”

He cautioned that SAMA had warned against the negative repercussions of the circulation of this electronic currency, especially since most countries do not officially recognize it.

Sawa investment

The Bitcoin phenomenon reminds me of the phenomenon of Sawa investment, which had tremendous acceptance in Saudi society more than 10 years ago. However, when this turned out to be a big scam, many naïve and innocent people (I do not want to call them fools) became victims by incurring huge losses. The investors in this scam were enticed with the false promise that they could earn a huge margin of profit.

At the time, a friend of mine, who was a broker, contacted me and attempted to persuade me to make investments in this so-called lucrative business. When I sought clarification about making profits from the investment, he said: “If you make an investment by paying a sum of SR8,000 to the supervisor of the scheme, that amount will increase to SR10,000 after a month.

This means that anyone who invested SR8,000 would be able to earn a profit of SR2,000 in a month. When I asked him whether he was sure that this would happen, his reply was an emphatic yes, saying that the supervisor had amassed millions of riyals.”

“Then I told him that there was either swindling or stupidity involved in the scheme and that I did not want to be a part of it. I tried to convince him and others not to fall victim to such traps, which are orchestrated by swindlers who target innocent people who are greedy and eager to get rich quick. These people will later find out that they have been victims of cheating.

OPINION: Avoiding the Bitcoin trap

I am of the view that the Bitcoin bubble is no different from the Sawa bubble and similar scams. As for the Sawa scam, it was a fraud that took place in Saudi Arabia and its perpetrators are behind bars serving their jail terms following their conviction for fraud and embezzlement. However, dubious Bitcoin currency transactions are being made at the global level, especially in some European countries as well as in Japan where this currency is being exchanged for hard currencies.

I would like to draw the attention of the Saudi Arabian Monetary Authority (SAMA) to this matter about which Dr. Dahlan wrote in detail. SAMA, the central bank, has to redouble its efforts to contain this phenomenon by making use of various media outlets to warn the public about the danger of Bitcoin transactions.

There should be an intensified campaign to highlight the fact that this currency is like a bubble that may burst at any moment and those who invest in it will find that that they have lost everything that they have invested.

This article was first published in the Saudi Gazette.

Dr. Ali Al-Ghamdi is a former Saudi diplomat who specializes in Southeast Asian affairs. He can be reached at [email protected] or via Twitter @DrAliAlghamdi.

Disclaimer: Views expressed by writers in this section are their own and do not reflect Al Arabiya English's point-of-view.
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