Is a little bit of Bitcoin in our futures?
I am often asked questions about Bitcoin, and cryptocurrencies in general, on whether they make a good investment.
Bitcoin is just one of over 4,000 different cryptocurrencies globally, according to investopedia.com. While many of these cryptocurrencies have little to no following or trading volume, some enjoy immense popularity among dedicated communities of backers and ‘investors’. Some of the leading cryptocurrencies outside Bitcoin are Ethereum, Litecoin and the new favourite of many, Cardano.
Bitcoin is a form of digital money, meaning that unlike physical money, it’s a currency traded online across a computer network of thousands. That makes it difficult to have a common record of all the transactions, but a technology known as blockchain makes this possible.
Blockchain is a shared transaction record – it prevents anyone from ‘double spending’ Bitcoins and makes it extremely hard for anyone to alter historical transactions. It is very hard, if not impossible, to shut down or interfere with.
Bitcoin was the first established cryptocurrency in 2009. In the way gold is mined before it is cleaned, melted and sold, cryptocurrencies are also mined; but this form of mining is of course digital, and involves computers solving increasingly complex mathematics problems. When problems are solved, Bitcoin is produced. But those problems increase in difficulty over time, which is why enormous amounts of energy and computational power are required to mine Bitcoin today.
The source code of the cryptocurrency means it is finite: only 21m Bitcoins can ever be mined. Around 18.5m have been mined to date, however the number in active circulation is considerably lower – PCs have been lost or discarded, and people have died without leaving their private key details (used to access your Bitcoin). In both instances, that means the Bitcoin is lost for good.
The buying and selling of Bitcoins began in 2010, and in 2011 it reached parity with the dollar, with 1 Bitcoin worth $1. Yet as I write, the price of 1 Bitcoin has rocketed to over $50,000! But the journey has been anything but smooth, with wild price swings in very short periods of time.
I don’t consider Bitcoin to be an investment because it doesn’t produce anything. A buy-to-let property is an investment because it produces a rental income, and buying shares is an investment because the company produces a profit and pays dividends. Bitcoin, like gold, oil and grains, experiences price rises and falls based on supply and demand, which makes them commodities.
The credibility of Bitcoin (and dare I say its future) has been reinforced recently after a number of respected hedge funds bought into it, along with Tesla, which purchased $1.5bn-worth. We will also soon see PayPal and Square offering cryptocurrency products.
Whether all 4,000 cryptocurrencies will last, who knows, but I think it’s fair to say the future of Bitcoin looks much more secure after institutional investors got involved.
If you follow them and do the same, bear in mind that ‘volatility’ is the word most closely associated with Bitcoin’s value so far.
5 things to know about cryptocurrencies
- The Bitcoin inventor is unknown. A lot of people have claimed to be the one who started Bitcoin, but none have proved credible. The most common theory credits the creator as Satoshi Nakamoto, but a popular belief is that this name is simply a merging of leading tech giants: Samsung-Toshiba-Nakamichi-Motorola.
- When dealing in cryptocurrency you hold your currency in a crypto wallet (digital wallet), which has public and private keys. You are provided with a private key to gain access to it and if you happen to lose your private key, the chances of getting it back are close to zero.
- China is the biggest miner of cryptocurrency. It is a lucrative business and China controls around 65% of the mining network, with the USA and Russia in second place with 7% each.
- Cryptocurrencies cannot be physically banned because anyone can get a crypto wallet. Regulations can be drawn up, but it’s hard to see cryptocurrency markets being stopped.
- Some countries have imposed restrictions on investments in cryptocurrencies, the extent of which varies from one place to another. Algeria, Bolivia, Morocco, Nepal, Pakistan, and Vietnam have banned any and all activities involving cryptocurrencies.
