Bitcoin (BTC) is a new type of digital currency that has cryptographic keys, is decentralized to a network of computers used by users and miners around the world, and is not controlled by a single organization or government. It is the first digital currency to capture the attention of the public and is being accepted by more and more merchants. Like other currencies, users can use digital currency to purchase goods and services online, as well as in some physical stores that accept them as payment. Currency traders can exchange Bitcoins for Bitcoin exchanges.
There are significant differences between Bitcoin and traditional currencies (e.g., the US dollar):
- Bitcoin has no centralized authority or clearing (e.g., government, central bank, MasterCard, or Visa network). The peer-to-peer payment network is managed by users and miners around the world. Currency is transferred directly between users anonymously via the Internet without going through a clearing house. This means that transaction rates are much lower.
- Bitcoin is created through a process called “Bitcoin mining”. Miners around the world use mining software and computers to solve complex bitcoin algorithms and accept Bitcoin transactions. They are provided with transaction fees and new Bitcoins created when solving Bitcoin algorithms.
- There is a limited amount of bitcoins in circulation. According to Blockchain, there were about 12.1 million in circulation on December 20, 2013. The difficulty of exploiting Bitcoins (solving algorithms) is more difficult as more Bitcoins are generated, and the maximum number in circulation is limited to 21 million. The limit will not be reached until 2140. This makes Bitcoins more valuable because more people use them.
- A ledger called ‘Blockchain’ records all Bitcoin transactions and shows the assets of each Bitcoin owner. Anyone can access the ledger to verify transactions. This makes digital currency more transparent and predictable. More importantly, transparency prevents Bitcoins fraud itself and double spending.
- Digital currency can be acquired through Bitcoin mining or Bitcoin exchanges.
- Digital currency is supported by a limited number of merchants in the network and in some brick outlets.
- Bitcoin wallets (similar to PayPal accounts) are used to store Bitcoins, private keys and public addresses, and to transfer Bitcoins between users anonymously.
- Bitcoins are not insured and are not protected by government agencies. Therefore, secret keys cannot be recovered if they are lost on a hard drive stolen or failed by a hacker or because a Bitcoin exchange has been closed. If secret keys are lost, the associated Bitcoins cannot be recovered and would be out of circulation. Visit this link for FAQs on Bitcoins.
I believe that Bitcoin will gain greater acceptance from people because users can be anonymous while buying goods and services online; transaction rates are much lower than credit card payment networks; anyone can access a public textbook that can be used to prevent fraud; the currency supply is 21 million, and the payment network is managed by users and miners instead of the central authority.
However, I don’t think it’s a great way to invest because it’s very volatile and not very stable. For example, the price of bitcoin has risen from about $ 14 to a peak of $ 1,200 this year at the time of writing before it dropped to $ 632 per BTC.
Bitcoin has risen this year because investors thought the currency would gain greater acceptance and the price would rise. The currency fell 50% in December as BTC China (China’s largest Bitcoin operator) announced that it could not accept new deposits as a result of government regulations. And according to Bloomberg, China’s central bank has banned financial institutions and payment companies from managing bitcoin transactions.
Bitcoin is likely to gain greater public acceptance over time, but the price is highly volatile and very sensitive to news that could negatively affect the currency, such as government regulations and restrictions.
Therefore, I do not recommend investors to invest in Bitcoins unless they buy less than $ 10 USD per BTC, which would allow the safety margin is much higher.
Otherwise, I think it’s much better to invest in stocks with strong foundations, as well as large business solutions and management teams, because the underlying companies have their own values and are more predictable.
Disclosure: Victor Liang has no position in Bitcoins and has no plans to change position in the next 72 hours.