Well, as a finance blogger, I should write some articles about what keeps people busy at the moment. And for a couple of weeks now, bitcoin is all over the news again because of the rapid price increases and the huge volatility.
I guess most of you have read a lot of stuff about crypto currencies already, but here is a nice explanation of btc, and the blockchain technology: https://www.forbes.com/sites/madhvimavadiya/2017/08/22/blockchain-bitcoin-ethereum/#7b7c69916df9 .
Furthermore, the big bang theory made an episode about bitcoin (link: s11e9). The moral of this episode is quite familiar to me. (I knew bitcoin when it was worth barely anything, and couldn’t find them on my old laptop anymore..).
So now you have read some stuff about bitcoin, I will just share my thoughts about it.
The four attributes of money:
1. It’s divisible (i.e. you can make small or large units of it.) You have cents, dollars, 100 dollar bills etc. Or by weight, like 1 gram of gold, or 10grams, or an ounce.
2. It’s hard to duplicate, limited amount of gold in the world (scarcity). Sea shells or any other common object won’t work.
3. It is easy to transport (i.e. if you can’t move it, you can’t “give” it to someone else as easily)
4. It’s durable. i.e. the ‘react’ part. Gold for example doesn’t corrode.
So by looking at these four points, it looks like bitcoin can be used as a currency. However, a currency stands or falls by the users. To get accepted as a currency, it should become a mainstream currency. It should not be seen as a weird hacker/ drug dealer coin by the general public. Furthermore it has to become easy to purchase bitcoins, without too big transaction costs or bid/ask spreads.
Then, bitcoin has to be able to process transactions pretty quick. People don’t like waiting for their money. But now they are still doing that anyway, because a bank transfer can also take up a few days. The problem with bitcoin transaction speed might arise when bitcoin is not merely used as an ‘investing’ opportunity, but also used for buying groceries. Then the transaction volume will skyrocket, and this will probably cause delays in the order of weeks before the transactions will be processed.
Is bitcoin safe?
Bitcoin exchanges have also proven to not be really reliable. Like Mt. Gox and others stealing other people’s bitcoins, or exchanges giving out tokens when going broke. So because of this, it is safer to store your btc on your own hard drive somewhere. But sloppyness might cause loss of your bitcoins, so make sure you have sufficient back ups.
Another issue is that bitcoin is not backed by some commodity, asset, claim or anything else. They say there is a max amount of 21M bitcoin, which creates scarcity, but if noone gives a crap about bitcoin (why would they), all value will can be lost within days. So in the end bitcoin is worth what the idiot or speculator is willing to pay for it.
Reasons to buy bitcoin
For now the bitcoin price keeps inflating because of the turmoil in the world, and as an escape from hyper inflation. It is also a relatively cheap way to send money to family on the other side of the world. And as long as the price keeps rising, it’s a nice speculation.
So nobody knows how far bitcoin will go, there are many altcoins like bitcoin, so bitcoin is not that special, except that is was first. But there sure is money to be made investing in these cryptos. Especially if you know when to get out before the bubble pops. And who knows, maybe one day bitcoin gets real backing from governments and large companies.
By the way, I coudn’t completely stay out of the cryptos (I love the volatility), so I do own some Dash at the moment of writing. But I’m continuously keeping my eyes out to sell and cash out in the not so far future, because I do believe this is a bubble that will pop, the question is “when?”.