Bitcoin is digital money that you can transfer to another person without the need of a third party, like a bank.
It can be thought of as a digital equivalent of cash – it’s just one person transferring value to another person, no bank involved.
In fact, Bitcoins are not issued by a bank or government, so an even more apt analogy than cash might therefore be gold.
Ok, digital gold, got it. Why are people excited?
There are no transaction costs
Because no third party is needed, there is nobody charging a transaction cost.
Banks, card issuers and payment processors places a 1-5% transaction fee on that coffee you bought this morning, and everything else you buy.
This is not very visible in everyday life, because it’s almost always baked into the price of things, but if you start transferring money internationally with companies like Western Union, you realize that there is quite a bit of money in the business of transferring money.
Bitcoin takes currency power away from banks and governments
Banks and government have the legal and physical ability to create money. (Read more on Wikipedia – Money Creation) The main problem is that whenever money is created, it dilutes the value of everyone’s money, which makes it a super-fast, completely silent, taxation.
Sometimes, governments and banks use this power responsibly, but sometimes, they do not. Lately, there has been a lot of the latter, with the Financial crisis of 2007–08 caused by irresponsible lending, so a lot of people are starting to think that we probably are more reliant on banks and government that we want to be.
An even more current example is Argentina, which has a 11% inflation (!) on its currency.
How does Bitcoin work?
With that said, all Bitcoin transactions, from the beginning of time, are written down in an enormous, public ledger.
When you transfer money from your Bitcoin wallet to another person, you do that by writing this transaction down in the public ledger.
Everyone is watching this ledger and has their own copies of it, and so they now know that there is less money in your wallet, and more money in a friend’s wallet. So everyone knows how much money each wallet contains.
This is where your money is stored, in this public ledger with millions of copies that everyone maintains together. They do, however, not know who owns that wallet – Bitcoin has no notion of identity.
So what’s preventing another person from transferring money from my wallet to their own?
This is where cryptography comes in.
When your Bitcoin wallet is generated, it’s given to you in two parts. One public part, an address, that you give to other people so that they know where to send you money, and a secret part, a key.
The key is used to “sign” transactions.
It takes the amount, the sender address, receiver address, and the key, jumbles it together with math, and out comes a signature, that you put in the ledger along with the transactions.
Due to how cryptography works, other people can mathematically verify that the person that generated this signature for this transaction must indeed have the key for this wallet.
They can, however, not work backwards to what the key actually is – that would take a supercomputer thousands of years to do.
Not everyone likes Bitcoin.
According to Andreas Antonopoulos, an independent expert on cryptocurrencies;
- Bitcoin isn’t money
- Blockchain isn’t a system of currency
- It is a PLATFORM OF TRUST.
- It’s Not a company nor a product or services you can sign up for
- It is Not a currency ; currency is just the first application
- It is the concept of decentralization applied to the human communication of value.
Warren Buffett is probably one of the famous Billionaires who says Bitcoin is “The Real Bubble”
Should I Invest in Bitcoin?
Let’s look at the core fundamentals of bitcoin:
The halving every four years – the bitcoin protocol automatically reduces the volume of bitcoin that can be mined.
The last halving happened in July ’16 and the reduced supply is undoubtedly already having an effect.
Bitcoin (BTC) represents the digital gold standard
This is known to be a safe haven when economic challenges are around – eg with Brexit it rose 15%, when DT got in it rose by 4.5% – with general economic uncertainty its role as a safe haven will become increasingly important.
This role has increased momentum given current global uncertainty – especially the DT effect.
BTC represents the reserve currency of the cryptocurrency space – to get into the new ICO’s (Initial Coin Offferings – the IPO’s for cryptocurrencies) you typically need BTC to buy in.
New cryptocurrencies will rise exponentially – some will be absolute rubbish – some will be amazing. BTC will be used to buy them.
With China playing an ever increasing role in the world economy, 80% are mined there and around 75% traded there – these will drive increased usage and awareness.
China currently has currency restrictions and monies are being shipped out of the country through Bitcoin.
Cryptocurrencies will increasingly become mainstream including BTC – although BTC will be a very minor cryptocurrency from a retail perspective – there will be a major retail coins created and used.
On the downside:
China is showing hints of regulation and the Chinese exchanges in recent days have already instigated some proactive measures – eg stopping/limiting margin trading on bitcoin.
Internationally there is confusion as to what BTC represents – some jurisdictions call it property, some a commodity, some a currency.
There could be knee-jerk reactions from a regulatory point of view – e.g. in Florida last year BTC was defined as property in an Anti-money laundering case and the case thrown out. In the absence of an appeal this could open the floodgates in Florida for illegal activities.
If DT maintains his passionate anti-muslim stance and anti-terror threat – despite his belief in free markets there may be some negative action by regulators – especially given bitcoin can be seen to be (pseudo) anonymous.
Over 1/3 of all exchanges have been hacked and any bad news coming out of the space will send BTC into freefall.
Technology is moving ahead so quickly that even though the protocol has never been hacked to date if quantum computing gets used by bad actors it could de-stabilise BTC through a major hack.
The community recognises this medium -term risk and I am sure are keeping a close eye on this core risk.
On balance, there are strong drivers in favour as long as any investment decision weighs up the downsides as well.
I have only touched on the downsides – because the technology is so new there are so many unknown left-field issues that could arise.
Because I am working with the technology on a daily basis I feel comfortable with the risks that I understand.
So if you decide to invest go in with your eyes open that you could lose everything and make your own assessment and educate yourself about the market and the technology.
Should I REALLY invest in Bitcoin?
Do not forget the fact that you are playing a game of high risk, high reward. Cryptocurrencies in its current form are VERY volatile.
Do not expect to win forever, or lose forever.
Some days you will cry, others you will hysterically laugh at your success, dance around your room, or even drive lambos.
Your portfolio value will crash (eventually), but that is okay. When times are good, everyone feels like they are a genius. If your coin tripled in a month, you may feel like you are a genius. But do not forget the fact that what comes up must go down.
What goes down, has great potential to eventually come back much stronger. This does not go for all investments, only the ones that have real value.
If your investment sucks, then it will only go down.
News and rumours are more important in cryptos than technical analysis ever will be. This only applies if you are day/week/month trading. If your plan is to just find a coin and hold then ignore this advice I wrote.