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 traders. Like other currencies, users can use digital currency to purchase 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 bitcoins and traditional currencies (such as the US dollar):
- Bitcoin does not have a centralized governing body or settlement center (e.g., government, central bank, MasterCard, or Visa network). An equal 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 settlement center. 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.
- There is a limited number of bitcoins in circulation. According to Blockchain, as of December 20, 2013, there were about 12.1 million people in circulation. The difficulty of mining bitcoins (solving algorithms) is becoming more complex as more bitcoins are generated and the maximum volume in circulation is 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 transactions with bitcoins and shows the corresponding stocks of the owners of each bitcoin. Anyone can access the general ledger to verify transactions. This makes the digital currency more transparent and predictable. More importantly, transparency prevents fraud and double spending of the same bitcoins.
- Digital currency can be purchased through bitcoin mining or a bitcoin exchange.
- Digital currency is accepted by a limited number of merchants online and at some retailers.
- 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.
- Bitcoin is not insured or protected by government agencies. Therefore, they cannot be recovered if the secret keys are stolen by a hacker or lost on a faulty hard drive or due to the closure of a bitcoin exchange. If secret keys are lost, the associated bitcoins cannot be recovered and will be taken out of circulation. Visit this link to get answers to your questions about bitcoin.
I believe that bitcoin will gain more public recognition because users can remain anonymous when buying goods and services online, and transaction fees are much lower than credit card payment networks; a public book is available to anyone who can be used to prevent fraud; the currency supply is limited to 21 million, and the payment network is managed by users and miners instead of the central authority.
However, I don’t think it’s a great investment tool because it’s extremely volatile and not very stable. For example, the value of bitcoin has risen from $ 14 to a peak of $ 1,200 this year before dropping to $ 632 per BTC at the time of writing.
This year, bitcoins have increased because investors believed that the currency would gain more recognition and that it would increase in price. In December, the currency plunged 50% because 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 price is highly volatile and very sensitive to news such as government rules and restrictions that can negatively impact the currency.
Therefore, I do not suggest investors invest in bitcoin if they have not been purchased for less than $ 10 per BTC because it would allow 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 major companies have their own 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.