Bitcoin (BTC) is a new type of digital currency that has cryptographic keys, is decentralized in a computer network 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 attract public attention 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 payment as a method of payment. Currency traders can also exchange Bitcoins in exchange.
There are some major differences between Bitcoin and traditional currencies (e.g., the US dollar):
- Bitcoin does not have a centralized authority or clearing house (e.g. government, central bank, MasterCard or Visa network). The peer-to-peer payment network is managed by users and miners around the world. The money is transferred anonymously directly between users via the Internet, without going through a clearing house. This means that transaction fees 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. Transaction fees and Bitcoin algorithms are rewarded with new Bitcoin generated by solving them.
- There is a limited amount of bitcoins in circulation. According to the Blockchain, as of December 20, 2013, there were about 12.1 million in circulation. The difficulty of mining Bitcoin (solving algorithms) becomes more difficult as more Bitcoin is generated, and the maximum number in circulation is limited to 21 million. The limit will not be reached until approximately 2140. This makes Bitcoins more valuable as more people use them.
- A public ledger called ‘Blockchain’ records all Bitcoin transactions and shows the properties of each Bitcoin owner. Anyone can access the public registry to verify transactions. This makes digital currency more transparent and predictable. More importantly, transparency prevents fraud and double spending on equal Bitcoins.
- Digital currency can be obtained through Bitcoin mining or Bitcoin exchanges.
- Digital currency is supported by a limited number of online merchants and in some brick sellers.
- Bitcoin wallets (similar to Paypal accounts) are used to store Bitcoins, private keys and public addresses, as well as to transfer Bitcoins between users anonymously.
- Bitcoins are not insured and are not protected by government agencies. Therefore, secret keys cannot be recovered if a hacker steals them or loses them on a failed hard drive or by closing a Bitcoin exchange. If secret keys are lost, related Bitcoin cannot be recovered and would be out of circulation. Visit this link to get a frequently asked question on Bitcoins.
I believe that Bitcoin will gain greater public acceptance because while users can remain anonymous while buying goods and services online, transaction fees are much lower than credit card payment networks; a public textbook is available to anyone that can be used to prevent fraud; the money supply is limited to 21 million, and the payment network is managed by users and miners instead of a central authority.
However, I don’t think it’s a great investment tool because it’s very volatile and not very stable. For example, the price of bitcoin rose from around $ 14 to a peak of $ 1,200 USD this year, before falling to $ 632 per BTC at the time of writing.
Bitcoin rose this year as investors speculated that it would gain greater currency acceptance and the price would rise. In December the currency fell by 50% because BTC China (China’s largest Bitcoin operator) announced that it could not accept new deposits due to government regulations. And according to Bloomberg, China’s central bank banned financial institutions and payment companies from managing bitcoin transactions.
Bitcoin will gain more public acceptance over time, but its price is highly variable 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, as this would allow. much longer safety margin.
Otherwise, I think it’s much better to invest in stocks with strong foundations, as well as great business opportunities 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 his position in the next 72 hours.