Bitcoin (BTC) is a new type of digital currency – with cryptographic keys – that is decentralized to a network of computers used by users and miners around the world and is not controlled by a single organization or government. It is the first digital cryptocurrency to attract public attention and is accepted by a growing number of merchants. Like other currencies, users can use digital currency to buy goods and services online, as well as in some physical stores that accept it as a form of payment. Currency traders can also trade bitcoins on Bitcoin exchanges.
There are several major differences between Bitcoin and traditional currencies (such as the US dollar):
- Bitcoin does not have a centralized authority or clearing company (such as government, central bank, MasterCard or Visa network). Simultaneous payment network is managed by users and miners around the world. Currency is anonymously transferred directly between users via the Internet without passing through the clearing house. This means that the commission for transactions is 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 to approve bitcoin transactions. They are rewarded with a transaction fee and new bitcoins obtained by solving bitcoin algorithms.
- The number of bitcoins in circulation is limited. According to Blockchain, as of December 20, 2013, there were about 12.1 million in circulation. The difficulty of mining bitcoins (solution algorithms) is becoming more difficult as more bitcoins are created, and the maximum number in circulation is limited to 21 million. The limit will not be reached until about 2140. This makes bitcoins more valuable as more people use them.
- A public book called “Blockchain” records all bitcoin transactions and shows the respective holdings of each bitcoin owner. Anyone can access the public ledger to verify transactions. This makes the digital currency more transparent and predictable. More importantly, transparency prevents fraud and double the costs of the same bitcoins.
- Digital currency can be purchased through Bitcoin mining or the Bitcoin exchange.
- Digital currency is accepted by a limited number of merchants online and in some regular retail chains.
- Bitcoin wallets (similar to PayPal accounts) are used to store bitcoins, private keys and public addresses, as well as to anonymously transfer bitcoins between users.
- Bitcoins are not insured or protected by government agencies. Therefore, they cannot be recovered if the secret keys have been stolen by a hacker or lost due to a faulty hard drive, or due to the closure of the Bitcoin exchange. If secret keys are lost, related bitcoins cannot be recovered and will be withdrawn from circulation. Follow this link to learn about bitcoin.
I believe that bitcoin will gain more public recognition because users can remain anonymous when buying goods and services online, the transaction fee is much lower than in credit card payment networks; a public book is available to anyone that can be used to prevent fraud; the amount of currency is limited to 21 million, and the payment network is managed by users and Miner, not the central authority.
However, I don’t think it’s a great tool for investing because it’s very volatile and not very stable. For example, the price of bitcoin has risen from about $ 14 to a high of $ 1,200 this year before falling to $ 632 per BTC at the time of writing.
This year, bitcoin has risen because investors believed the currency would gain more recognition and that it would rise in value. The currency fell 50% in December as BTC China (China’s largest bitcoin operator) announced it could no longer accept new deposits due to government decrees. And according to Bloomberg, China’s central bank has banned financial institutions and payment companies from processing bitcoin transactions.
Bitcoin is likely to gain more public recognition over time, but its value is extremely volatile and very sensitive to news such as government regulations and restrictions that could negatively affect the currency.
Therefore, I do not advise investors to invest in bitcoin if they have not been purchased for less than $ 10 per BTC because it will much greater margin of safety.
Otherwise, I believe it is much better to invest in stocks that have strong fundamentals as well as great business prospects and management teams because core 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.