Bitcoin: Is It All Hype?

If you had spent $27 on Bitcoin when it was created by Satoshi Nakamoto in 2009, your investment would now be worth over $37,000,000.
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Widely regarded as the greatest investment tool of all time, Bitcoin experienced a meteoric rise in 2017 from $777 to $17,000.

Making millionaires out of opportunistic investors and leaving financial institutions speechless, Bitcoin has answered its critics at every turn this year, and some believe this is just the beginning.

The launch of bitcoin futures on December 10, which will allow investors to access the bitcoin market through a major US regulated exchange for the first time, means we’re just getting started.
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What makes Bitcoin so valuable is that there is a limited supply. The maximum there will ever be is 21 million bitcoins, and unlike regular fiat currencies, you can’t just print more of them whenever you want. This is because Bitcoin works on a proof-of-work protocol: to create it, you have to mine it, using your computer’s processing power to solve complex algorithms on the Bitcoin blockchain. Once this is achieved, you will receive Bitcoins as payment for the “work” you have done. Unfortunately, the reward you get for mining has dropped dramatically almost every year since Bitcoin was introduced, meaning that for most people, the only viable way to get Bitcoin is to buy Bitcoin on an exchange. Is it worth the risk at the current price level?
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Many believe that Bitcoin is just a bubble. I spoke to cryptocurrency expert and long-term investor Duke Randall, who believes the asset is overvalued: “I would compare it to many supply and demand bubbles in history, such as the Dutch Tulip Mania and the dotcom bubble of the late 90s. Prices are purely guesswork. based, and when you look at the functionality of Bitcoin as a real currency, it’s almost embarrassing.” For those who don’t know, the dotcom bubble is the period between 1997-2001 when many Internet companies were founded and received wildly optimistic valuations based solely on speculation, which later plummeted by 80-90% as the bubble began to collapse in the early 2000s. Some companies, such as eBay and Amazon, have recovered and are now well above those estimates, but for others it was the end of the line.

Bitcoin was originally created to take power away from our financial systems and allow people to control their own money by removing the middleman and enabling peer-to-peer transactions. However, it is currently one of the slowest cryptocurrencies on the market, with transaction speeds four times slower than the fifth-largest cryptocurrency and its closest rival for payment solutions, Litecoin. The untraceable privacy coin Monero makes transactions even faster with an average lock time of just two minutes, a fifth of the time Bitcoin can do it, and that’s without anonymity. The world’s second-largest cryptocurrency, Ethereum, already has a higher transaction volume than Bitcoin, despite being valued at just $676 per Ether, compared to Bitcoin’s $16,726 per Bitcoin.

So why is the price of Bitcoin so high? I asked Duke Randall the same question. “It all boils down to the same economics of supply and demand, relatively few bitcoins available, and its recent spike in price has attracted a lot of media attention, coupled with the launch of bitcoin futures, which many see as the first sign of bitcoin being adopted by the mass market, leading to to the point that many people jump on the bandwagon for financial gain. Like any asset, when there is more demand to buy than to sell, the price goes up. This is bad because these new investors are entering the market without understanding the blockchain and the underlying principles of these currencies, which means they are likely to burn out.”

Another reason is that Bitcoin is extremely volatile, known to swing up and down by thousands of dollars in less than a minute, which, if you’re not used to it and don’t expect it, causes less experienced investors to panic sell, leading to losses This is another reason why Bitcoin will be difficult to accept as a form of payment. The value of Bitcoin can change significantly between how providers accept Bitcoins from customers and sell them on exchanges for their local currency. This erratic movement can destroy their entire profitability. Will this volatility disappear anytime soon? Unlikely: Bitcoin is a relatively new asset class, and while awareness is growing, only a very small percentage of the world’s population owns Bitcoin. Until it becomes more common and its liquidity improves significantly, volatility will continue.

So if Bitcoin is useless as a real currency, what is its use? Many believe that Bitcoin has evolved from a viable form of payment to a store of value. Bitcoin is like “digital gold” and will simply be used as a benchmark for other cryptocurrencies and blockchain projects to be correlated and traded against. Recently, there have been stories of people in hyperinflationary countries like Zimbabwe buying bitcoins to hold on to the wealth they have rather than see its value drop due to the indiscretions of the central banking system.

Is it too late to get involved in Bitcoin? If you believe in what these cryptocurrencies will do for the world, then it’s never too late to get involved, but with the value of Bitcoin being so high, it’s a boat that has already sailed for some. You might be better off looking at Litecoin, which is up 6,908% year-to-date, or Ethereum, which is up an incredible 7,521% year-to-date. These new, faster currencies hope to achieve what Bitcoin first set out to do back in 2009, and replace government fiat currencies.

Who knows what the price of these currencies will be in ten, fifteen or even twenty years? One thing’s for sure, though: we’d better buckle up because it’s going to be a wild ride.