Had you spent $27 on Bitcoin when it was produced by Satoshi Nakamoto in 2009 your investment would now be worth over $37,000,000?
Widely regarded as the best investment vehicle of all time, Bitcoin has seen a meteoric rise during 2017 going from $777 all the way to $17,000.
Creating millionaires out of opportunistic investors and leaving financial institutions open-mouthed, Bitcoin has answered its critics at every milestone in 2010 and some believe that is just the beginning.
The launch of Bitcoin futures on December 10th, which for initially allows investors to enter the Bitcoin market by way of a major regulated US exchange, implies that we are simply getting started.
What makes Bitcoin so valuable is that there’s a finite amount in existence. There will only ever be a maximum of 21 million Bitcoins and unlike normal fiat currencies, you can’t just print more of them whenever you feel like. This is because Bitcoin runs on a proof of work protocol: to be able to create it, you have to mine it using computer processing power to solve complex algorithms on the Bitcoin blockchain. Once that is achieved, you’re rewarded with Bitcoin as payment for the “work” you have done. Unfortunately, the reward you receive for mining has decreased drastically almost every year since Bitcoin’s inception, which means that for many people the only real viable way to get Bitcoin is buying it on an exchange. At the present price levels is that a risk worth taking?
Many believe Bitcoin is merely a bubble. I spoke to cryptocurrency expert and long haul investor Duke Randal who thinks the asset is overvalued, “I’d compare this to many supply and demand bubbles over histories such as Dutch Tulip Mania and the dot com bubble of the late 90s. Prices are purely speculation based, and when you look at Bitcoin’s functionality as an actual currency it is practically embarrassing.” For individuals who don’t know, the dot com bubble was a period between 1997-2001 where many internet companies were founded and given outrageously optimistic valuations based purely on speculation that later plummeted 80-90% while the bubble begun to collapse in the early 2000s. Some companies such as eBay and Amazon recovered and now sit far above those valuations but for others, it was the conclusion of the line.
Bitcoin was originally created to be able to take power away from our financial systems and put people in control of their own money, cutting out the middle man and enabling peer to peer transactions. However, it’s now one of the slowest cryptocurrencies available on the market, its transaction speed is four times slower than the fifth biggest cryptocurrency and its nearest competitor for payment solutions Litecoin. Untraceable privacy coin Monero makes transactions even quicker, boasting the average block time of just two minutes, a fifth of that time period Bitcoin can take action in, and that’s without anonymity bitcoin mixer. The world’s second biggest cryptocurrency, Ethereum, already features a higher transaction volume than Bitcoin despite being valued at only $676 dollars per Ether compared to Bitcoin’s $16,726 per Bitcoin.
So how come Bitcoin’s value so high? I asked Duke Randal the exact same question. “All of it goes back to the exact same supply and demand economics, relatively there is not quite definitely Bitcoin available and its recent surge in price has attracted lots of media attention, this combined with the launch of Bitcoin futures which many see as the initial sign Bitcoin is being accepted by the mass market, has resulted in lots of people jumping on the bandwagon for financial gain. Like any asset, if you find a greater demand to get than to offer, the cost goes up. This is bad since these new investors are entering industry without understanding blockchain and the underlying principles of those currencies meaning they will likely get burnt “.
Another reason is that Bitcoin is very volatile, it’s been recognized to swing up or down thousands of dollars within just one minute which if you should be not used to nor expecting it, causes less experienced investors to panic sell, resulting in a loss. This is yet another reason Bitcoin will struggle to be adopted as an application of payment. The Bitcoin price can move substantially between the time vendors accept Bitcoin from customers and sell it on to exchanges for his or her local currency. This erratic movement can eliminate their entire profitability. Will this instability disappear any time soon? Improbable: Bitcoin is really a relatively new asset class and although awareness is increasing, only a really small percentage of the world’s population hold Bitcoin. Until it becomes more widely distributed and its liquidity improves significantly, the volatility will continue.
So if Bitcoin is pretty useless as an actual currency, what are its applications? Many believe Bitcoin has managed to move on from being a feasible kind of payment to being a store of value. Bitcoin is much like “digital gold” and only will be used as a benchmark for other cryptocurrencies and blockchain projects to be measured against and traded for. Recently there has been stories of men and women in high inflation countries such as Zimbabwe buying Bitcoin to be able to hold on to what wealth they’ve as opposed to see its value decline underneath the recklessness of its central banking system.
Is it too late to get involved in Bitcoin? If you believe in what these cryptocurrencies can do for the planet then it’s never too late to get involved, but with the cost of Bitcoin being so high can it be a boat for some that has already sailed. You may be better off having a look at Litecoin, up 6908% for the entire year or Ethereum which is up an incredible 7521% for the year. These newer, faster currencies hope to attain what Bitcoin first attempted to do back its inception in 2009 and replace government-run fiat currencies.
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