According to an article published on USA Today, the biggest investing story of 2017 has been the incredible take-off of cryptocurrencies. Although several have risen to prominence over the past year, Bitcoin still remains the most popular. Here is a brief overview about this particular digital alternative currency — the price of which has tripled since the beginning of 2017, surpassing returns seen in many other investments.
1. What is Bitcoin?
Bitcoin started in 2009 and gained popularity as a way of sending money quickly and anonymously anywhere in the world.
As Bitcoin is decentralised, which means there is no government or central bank issuing or regulating it, using this cryptocurrency enables direct, private transactions between users, with virtually no transaction costs.
2. What is Blockchain technology?
It can accomplish the aforementioned tasks because it is powered by Blockchain technology. Simply explained in the article, a blockchain is a “decentralised and distributed ledger that can be accessed by many different parties simultaneously. When a transaction is completed, it is recorded on a "block." When a block's memory is full, it is added to the end of the blockchain, always in successive order. It then becomes part of the permanent database of transactions of the blockchain. For the purposes of Bitcoin, the blockchain records transaction details, like the amount and time, but not personal details of the parties involved.”
As transactions don’t need to be linked to a specific identity, but are tracked on this online database, its promise of anonymity has heightened Bitcoin’s appeal.
3. How can you buy Bitcoin?
There are many ways to buy, store and sell bitcoins. One of the most popular means is through a software known as a Bitcoin Wallet, which is a digital wallet used exclusively for bitcoins. Frequently used examples of these are Coinbase and Wirex.
For investors, the easiest way to gain exposure to bitcoins is often through a brokerage. Funds, such as the Bitcoin Investment Trust, were created for this purpose. However, it is important to be aware that shares in this fund (and similar ETFs) trade far above the underlying Bitcoin exposure.
4. Is it a wise investment?
It’s difficult to answer this question as every month there seems to be a new prediction about the future value of Bitcoin. In spite of its recent soar in popularity, which is thought to partly be accredited to increased faith in the legitimacy of cryptocurrencies, Bitcoin has experienced chaotic volatility in the past, and its future still looks uncertain.
There are many sceptics — Warren Buffett called Bitcoin a "mirage" in an interview in 2014, and JPMorgan Chase CEO, Jamie Dimon, said: "If you're stupid enough to buy it, you'll pay the price for it one day." The global chief economist at UBS Wealth Management, Paul Donovan, also argued that cryptocurrencies will never gain universal acceptance as governments don’t accept Bitcoin and never will, as it is a big economic advantage for them to be the monopoly provider of money, so they won't relinquish that power.
As a result, cryptocurrencies will arguably never be accepted as a medium of exchange for the single biggest transaction in any economy — paying taxes.
However, some analysts still forecast growth for Bitcoin, and the head of the International Monetary Fund, Christine Lagarde, recently stated virtual currencies might end up giving existing currencies a "run for their money."
Many believe that, if this is the case, it is then disposed for a big correction, which will burst the Bitcoin bubble and send prices plummeting. Given the amazing returns the cryptocurrency market has seen this year, it would be reasonable to assume that prices will not continue to increase forever.
5. What should you be aware of if you do want to invest?
If you do wish to invest in Bitcoin, it is advisable to proceed with caution, and investors should be prepared for things to swing dramatically either way.
As the cryptocurrency exchanges are unregulated, there are potential consequences to consider, such as flash crashes. Cryptocurrencies are known to be extremely volatile, and people who own bitcoins should be prepared to face sudden losses at any time. As a result, it's advisable to never put any money into virtual currencies that you can’t afford to lose. And if you do still wish to proceed, then it could be a good idea to diversify by buying more than one currency.
As Bitcoin is unregulated and virtual, it’s also important to be aware that any exchange is vulnerable to hacks. Investors have no guarantee that they’ll get their money back if something happens, and there is room for market abuse and illicit transactions.
However, what cannot be denied is that investors who have purchased Bitcoin have done spectacularly well so far. While investing in Bitcoin is not something that financial planners can advocate, as it is unregulated, and it is nearly impossible to accurately gauge its intrinsic value, it is alway advisable to stay well informed about an array of investment options. If you’re still a bit confused about Bitcoin, then don’t hesitate to arrange a meeting to discuss this cryptocurrency further.