Bitcoin is everywhere in the media at present, the value of a Bitcoin has passed $10,000, Bitcoin has been around since 2009. So why all of the hype now?
This article will not explain how Bitcoin works there are plenty of You Tube clips for this, what I want to talk about is should you be investing in Bitcoin. Like all investments you need to weigh up the risk verse the rewards and determine if it suits your investment profile.
So what is Bitcoin?
Basically it is currency used to buy goods and services generally over the internet, however, I expect in time you will be able to do so through a physical store using your phone. So it the same as having cash in your wallet or using your debit or credit card.
So owning Bitcoin is like having cash in the bank, except that there is no central body guaranteeing your money and no interest being paid on it. Bitcoin does have in place a decentralised ledger system to keep track of your money which provides security, the catch is that if it is stolen or lost there is no one to assist to recover your money.
As an investor if you want to hold cash, the current banking system is more secure and does provide interest. Bitcoin is not about cash as an investment it is about capital growth.
Why does Bitcoin go up in value?
Cash does not appreciate in value, it actually decreases due to inflation. Why is Bitcoin different? In simple terms there is limited supply and the supply is controlled by the makers of Bitcoin, new coins are created through the solving of mathematical equations. To increase supply the equations get easier but to reduce supply the equations are made harder. These equations are solved using super computers by what the call “Bitcoin Miners”.
So right now supply is short and demand is high so the price is moving higher. Will this continue? Depends on demand and demand will be driven by two factors:
1. People need the currency to do on line transactions and therefore trade traditional cash for Bitcoin.
2. Investors speculating on the price.
At present only a small percentage of people worldwide use Bitcoin on a regular bases to purchase goods. Which would leave me to believe the rest are investors speculating on the price going up.
Unlike most investments Bitcoin has no underlying value, it does nothing, is not protected by government legislation, it earns no income. There is no reason for the price to go up except that investors expect it to continue to go up. It reminds professional investors of the 17th Century Dutch Tulip & Bulb market bubble. Bitcoin is a highly speculative investment where you are just guessing where the price will go.
When big gains are made in this sort of investment you can be assured that most investors suffered big losses. It is basically gambling in something which has no rules. Keep in mind that in March 2017 the price was around $1000 per Bitcoin it is now at $10,000 per Bitcoin. This is a gain of 1000% in 8 months. For those looking to invest you may have missed the boat.
You also need to understand that this is a person to person system, to get Bitcoin your either mine it, sell something for it or pay cash for it. However you need to find someone who wants to sell their Bitcoin for cash or if you trying to get out you need to find someone who wants to pay cash for Bitcoin. For this you need a broker as such there are transaction fees.
The decentralised structure of the Bitcoin ledger system means that you cannot use walk into a bank and get your money back. If the price was to fall you may find that you simply cannot redeem you investment.