Bitcoin and Other Cryptocurrencies – 21st century fad, new money or something else of the future?
In 2017, you‘ll have a hard time finding a major bank, accounting firm, software company or a government that has not researched cryptocurrencies. Bitcoin specifically, is taking over the internet as the top performing currency, if one can call it that, in the world.
As Bitcoin hit an all-time high over the weekend, (again), it seems that many more people are starting to trust and invest in the cryptocurrency market. According to Moneyweb, the price of bitcoin price shot up from a high of R51 681 early Friday morning to a new record high of R64 900 on Monday afternoon. For many who are familiar with cryptocurrency, they can see the potential the currency has within the global financial landscape and beyond. For others, there is still the question of just exactly how trustworthy and reliable this so-called currency is and how smart it would be to invest in it.
What is Bitcoin exactly?
To put it simply and in the words of Satoshi Nakamoto, Bitcoin is a “peer-to-peer version of electronic cash [that] would allow online payments to be sent directly from one party to another without going through a financial institution”.
Specialised computers called “miners” verify and confirm transactions and the people or company’s controlling the miners are compensated in the currency they verify. This is called “mining”. In Bitcoin’s case, each Bitcoin can be split into 100 000 000 units (each unit is called a “satoshi”), and then stored in a “Blockchain”. The Blockchain is a decentralised public ledger that stores a full history of every Bitcoin and every satoshi transaction. It is has an open-source code which anyone can view or download for free at any time as no central authority or institution is responsible for managing the public network.
You can use Bitcoin to buy, invest or trade online and the currency is becoming more and more widely accepted across the globe.
Currently, it is becoming more apparent that Bitcoin can also be viewed as a store of value, something like digital gold. The real benefit to this is that the price cannot be manipulated by “printing” more fiat currencies.
Investing and trading in Bitcoin – is it worth the risk?
Investing is a major part of the Bitcoin community, but the currency is highly volatile and therefore, can be very risky.
As mentioned above, Bitcoin has been seen as an alternative to gold due to its independence from government and banks, there is a finite supply of Bitcoin and there is no asset to compare Bitcoin to, making it very difficult to value (this according to Capital Economics Global Chief economist, Andrew Kennington).
Cryptocurrencies are therefore similar to fiat currencies, on the one hand, because they are both valued on a perception, but on the other hand, they are very different because there is no inflation or infinite coin creation to devalue Bitcoin and most other cryptocurrencies.
As mentioned, there are multiple risks when investing in Bitcoin. This is new technology, and with that comes the risks of investing in something that one does not completely comprehend. Cryptocurrency is still difficult to understand creating unnecessary technological risks for now. Everyday this gets easier as fiat and user-friendly exchanges become available to the public, and management of off-network wallets is improving rapidly as well.
Bitcoin investors used to say to “noobs”, “only invest what you can afford to lose”. However, things have moved on and cryptocurrency risk levels are quickly aligning with traditional risk levels. That said, the market, even for Bitcoin, is very volatile, so getting into and out of cryptocurrencies is very risky. However, investing with a long-term view with no pressure to withdraw your investment is likely to see very high returns. Ask any “crypto hodler”.
Know your stuff
Lastly, and probably the most important thing to do if you are considering investing in Bitcoin is RESEARCH. As with any investment, you can never know too much about it. Do your research on the cryptocurrency, how it works, what it can be used for and how it is affected by other factors. Also try and understand the technological, financial and crypto-economic risks that come along with the investment and make a strategic decision outside of emotional distraction.
Remember, cryptocurrencies are not traditional fiat currencies, they are not equities and they are not gold. Almost everything you have learnt about the former is not applicable to cryptocurrencies. Although human psychology is still a major factor, crypto’s are typically driven by new and exciting forces such as new-use cases for them. This is one of the main reasons why they are not in a “bubble”. Technologies we have not even thought of will be released tomorrow, next week or next year which will have the ability to “10x” any given crypto within days or weeks. There is not enough research for us to predict how the future of cryptocurrency is going to play out, but whilst tokens like Bitcoin or Ether are required to drive new technologies, the medium to long term upside can only be immense.
So, should I invest?
There’s no denying it, in only eight years, Bitcoin has made its mark on the financial and other industries. If you have done your research and consider yourself smart enough to invest wisely, the risk may be worth taking. Cryptocurrency has the potential to grow exponentially and may eventually become the entire financial world, the internet, the world’s computer, and that’s just what we have already seen!
However, the future of cryptocurrency depends on government acceptance globally of the technology. Some governments are embracing it and others are terrified of it. Due to its design, it cannot be stopped and Venezuela has proved this already after Bitcoin was banned, yet its use continued to grow there. Because of this uncertainty coupled with the scaremongering from institutions likely to lose the most from cryptos such as banks and venture capitalists, the short-term future will, in all likelihood, be rocky. However, these new technologies are not going away and will be required by more and more new technologies at an ever-increasing pace as the world at large starts to understand the incredible benefits it has.
A tweet on Twitter recently suggested that the cryptocurrency technology is just past where the internet was in circa 1975 – operating out of people’s garages.
It’s also likely to dwarf the internet in its usefulness.
This report is the opinion of the authors and may not be used as investment advice