Bitcoin as an Investment: Opportunities and Risks

What is Bitcoin?

Bitcoin is a new currency that was created in 2009 by an unknown person using the alias Satoshi Nakamoto. Transactions are made with no middle men – meaning, no banks! There are no transaction fees and no need to give your real name. More merchants are beginning to accept them: You can buy webhosting services, pizza or even manicures!

Why Bitcoins?

Bitcoins can be used to buy merchandise anonymously. In addition, international payments are easy and cheap because bitcoins are not tied to any country or subject to regulation. Small businesses may like them because there are no credit card fees. Some people just buy bitcoins as an investment, hoping that they’ll go up in value.

How do you Acquire Bitcoins?

You can buy bitcoins on an Exchange. Several marketplaces called “bitcoin exchanges” allow you to buy or sell bitcoins using different currencies. Mt. Gox is the largest bitcoin exchange.

Owning Bitcoins

You can store your bitcoins in a “digital wallet,” which exists either in the cloud or on your computer. The wallet is a kind of virtual bank account that allows you to send or receive bitcoins, pay for goods or save your money. The dark side is, unlike bank accounts, bitcoin wallets are not insured.

Anonymity

Though each bitcoin transaction is recorded in a public log, names of buyers and sellers are never revealed – only their wallet IDs. While that keeps bitcoin users’ transactions private, it also lets you buy or sell anything without easily tracing it back to them. That’s why it has become the currency of choice for people online buying drugs or other illicit activities.

Why Bitcoin Is Booming

Now you might be wondering why bitcoin is such a hot topic? Who says only the government can make money? This year the value of the private currency bitcoin has climbed to unprecedented levels, while at the same time becoming far less volatile than in previous periods of rapidly increasing demand. Bitcoin has reached these new benchmarks despite news that might have depressed its value, such as the US Securities and Exchange Commission’s rejection of a fund permitting small traders to invest in bitcoin on the stock market.

Opportunities

Many argue that bitcoin, like other currencies, has value only because people perceive it to have value. It is for this reason that many critics view bitcoin’s price development as nothing more than a bubble. However, there are drivers behind bitcoin’s excellent returns that have nothing to do with hype or speculative opportunism.

Move Toward a Cashless Society

It is no secret that we are moving toward a cashless society as electronic payment services, such as debit and credit cards, mobile payments and mobile money are increasingly prevalent. This isn’t just a phenomenon in the U.S. and the U.K., where mobile payment systems Apple Pay and Android Pay are experiencing an increase in use, but also in developing nations. In an increasingly cashless society, bitcoin fits nicely into the equation as it can be used to make payments and international money transfers from any smartphone across the world.

Individuals Want to Handle Their Money Without Need for a Bank

Another reason for the increase in global Bitcoin demand is a desire for individuals to be their own bank. By storing part or all of one’s capital in a bitcoin wallet and using it to make payments for goods and services, anyone can become their own bank without the need for traditional banking intermediaries to conduct financial transactions. This development has been amplified by the growth of the Bitcoin economy, which now includes Bitcoin savings accounts, prepaid Bitcoin debit cards, Bitcoin peer-to-peer lending and a range of other services.

What are the risks of Bitcoin?

Well, like every investment, Bitcoin carries certain risks.

High volatility

The price of Bitcoin has a high volatility. Typical 30-day volatility is around 40 percent and a 90-day volatility is close to 70 percent. These swings in value are hard to stomach for many people. Although the cryptocurrency has an uptrend, it’s still risky.

Good currencies have low volatility, as owning unstable currency or accepting it as a form of payment becomes too risky.

Government regulations

If the government decides to declare owning Bitcoin illegal, you may find yourself in trouble. Currently, the government stance on cryptocurrencies is not clear. And the danger is real as Bitcoin is not taxed, and is somewhat of a competition to the government issued currency. Other regulations could also make Bitcoin less attractive.

Competition

Other cryptocurrencies could send Bitcoin into history. Offering faster transactions, complete anonymity, storage space and other improvements could lead to lower market share for Bitcoin. If we consider the high quality of emerging cryptocurrencies, this scenario seems plausible.

Security of services/products

To use Bitcoin, you need wallets, exchanges, payment processors, etc. Not these services have perfect security. And if your funds are stolen, all you can do is to hope your service provider will be kind enough to give you refund.

Mt. Gox is the worst example, where thousands of users were left without their funds after a big hacking attack.

No safety mechanisms

Bitcoin has no safety mechanisms. Typically, you’ll get a private key or random words which protect your wallet. If you lose your key, your funds will be gone with it. There’s no support to contact, no way to change the password, and no way you could verify your identity to get your account back. When it’s gone – it’s gone, there’s nothing anyone can do.

Bitcoin and Bitcoin Cash

If you’ve been following the Bitcoin scaling efforts lately, you already know that the Bitcoin blockchain forked on August 1, giving birth to a new currency called Bitcoin Cash (BCH). The event was surrounded by quite a bit of uncertainty over how well the new currency would perform.

But what exactly does the birth of this new currency mean?

There are many misconceptions about Bitcoin Cash and what it represents. To be clear, Bitcoin is not forking. Rather, some developers have created a new digital currency and formulated an effective means of distributing it, by giving it to everyone with an existing Bitcoin balance.

Testing the market

Bitcoin users now can own both Bitcoin and Bitcoin Cash following the split. However, this is only if you use either a wallet you control, meaning you own private keys, or one controlled by a third-party service provider that supports both currencies.

The creation of Bitcoin Cash is another turn in the long contentious road Bitcoin has taken in community attempts to scale. And even if Bitcoin Cash can’t retain value at its current level, it could still serve to bring peace to the Bitcoin community. The people that were actively trying to stop development on Bitcoin and centralize it, will now have their own chain to do whatever they want with it. I think this will positively impact Bitcoin.

Want to know more?

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References

http://money.cnn.com/infographic/technology/what-is-bitcoin/

https://bitcoin.com.au/page/bitcoin-cash-need-know/

https://www.wired.com/2017/05/bitcoin-come-roaring-back-risks/

http://www.nasdaq.com/article/bitcoin-as-an-investment-opportunities-and-risks-cm740800

 

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