What is Bitcoin and is it a good investment?

Bitcoin (BTC) is a new type of digital currency with encryption keys distributed to a computer network of users and miners around the world and not controlled by any organization or government. It is the first digital cryptocurrency to gain public attention and be accepted by more and more merchants. Like other currencies, users can use digital currency to buy goods and services online, as well as at some physical stores that accept it as a means of payment. Currency traders can also trade Bitcoins on Bitcoin exchanges.

There are several significant differences between Bitcoin and traditional currencies (e.g., the U.S. dollar):

  1. Bitcoin does not have a central authority or clearing house (e.g., government, central bank, MasterCard, or Visa network). The peer-to-peer network is managed by users and miners around the world. Currency is transferred anonymously directly between users via the Internet without a clearinghouse. This means that transaction fees are much lower.
  2. Bitcoin is created by a process called “Bitcoin Mining”. Miners around the world use mining software and computers to solve complex Bitcoin algorithms and accept Bitcoin transactions. They will be granted transaction fees and new Bitcoins created from solving Bitcoin algorithms.
  3. There are a limited number of bitcoins in circulation. According to Blockchain, there were approximately 12.1 million units in circulation on December 20, 2013. The extraction of Bitcoins (solving algorithms) will become more difficult as more Bitcoins are generated, with a maximum of 21 million in circulation. The limit will not be reached until about 2140. This will make Bitcoins more valuable as more and more people use them.
  4. A public ledger called “Blockchain” records all Bitcoin transactions and displays the corresponding holdings for each Bitcoin owner. Anyone can use public accounting to audit transactions. This will make the digital currency more transparent and predictable. More importantly, transparency prevents fraud and double consumption of the same Bitcoins.
  5. Digital currency can be acquired through Bitcoin mining or Bitcoin exchanges.
  6. A limited number of online merchants and some cobblestone retailers accept digital currency.
  7. Bitcoin wallets (similar to PayPal accounts) are used to store Bitcoins, private keys and public addresses, and to transfer Bitcoins anonymously between users.
  8. Bitcoins are not insured and are not protected by government agencies. Therefore, they cannot be recovered if the hacker steals the secret keys or they are lost on a faulty hard drive or due to the closure of the Bitcoin Exchange. If the secret keys are lost, the associated Bitcoins cannot be returned and would be disabled. From this link you will find frequently asked questions about Bitcoins.

I believe that Bitcoin will gain more acceptance from the public because users can remain anonymous when purchasing goods and services online, transaction fees are much lower than in credit card payment networks; general accounts are accessible to all in order to prevent fraud; The supply of foreign exchange is limited to EUR 21 million, and the payment network is operated by users and miners instead of the central authority.

However, I do not think it is a great investment tool because it is very volatile and not very stable. For example, the price of bitcoin rose from about $ 14 to a high of $ 1,200 this year before falling to $ 632 per BTC at the time of writing.

Bitcoin rose this year as investors expected the currency to gain wider acceptance and its price to rise. The currency fell 50% in December as BTC China (China’s largest Bitcoin operator) said it could no longer accept new deposits due to government regulations. And according to Bloomberg, China’s central bank banned financial institutions and payment companies from handling Bitcoin transactions.

Bitcoin is likely to gain more public acceptance over time, but its price is very volatile and very sensitive to news – such as government regulations and restrictions – that could negatively impact the currency.

Therefore, I do not recommend investors invest in Bitcoins unless they have been purchased for less than $ 10 USD per BTC, as this would allow much higher safety margin.

Otherwise, I think it’s much better to invest in stocks that have strong fundamentals as well as good business prospects and management teams because the underlying companies have intrinsic values ​​and are more predictable.

Disclosure: Victor Liang has no positions in Bitcoins and has no plans to change his position in the next 72 hours.