Pros And Cons Of Bitcoin Investments
Bitcoin’s popularity has exploded since its invention in 2010. Building on the new trend of blockchain-based cryptocurrencies, it has captured the interest of investors looking for an alternative to more traditional investments.
What is bitcoin?
It is the first cryptocurrency, which is a mixture of two words, cryptography and currency. It was created by Satoshi Nakamoto, who is widely accepted as a pseudonym. The identity of the creator has never been revealed, although Australian entrepreneur Craig Wright made a claim in 2016. For others, Dorian Nakamoto and Nick Szabo are also believed to be the creators of bitcoin.
There are two ways to get bitcoin (and other cryptocurrencies): buy or mine. Buying bitcoin is as easy as signing up for a cryptocurrency exchange. Here you are buying bitcoin that is owned by someone else.
Mining, on the other hand, is all about getting new bitcoin for the market. All cryptocurrencies are harvested by solving complex algorithmic problems. Put simply, you get a powerful computer to do some very difficult math calculations, and you get a small amount of bitcoin as a reward.
Cryptocurrencies operate on the concept of a blockchain, which is essentially a publicly accessible ledger. Anyone can consult the ledger to verify the authenticity of transactions and see where each particular bitcoin – or part of a bitcoin – is kept.
Now, let’s clarify something: Bitcoin transactions are both anonymous and transparent. Every transaction is traceable in that you always know where it is and where it went. However, they are anonymous in the sense that you will not know who owns the digital wallet they are in without the permission of the owner.
Why is bitcoin so valuable?
The goal of bitcoin – and other cryptocurrencies – is to become a new medium of exchange. Similar to how traditional money – like ringgit and dollars – works.
However, unlike currency controlled by a central bank, the value of bitcoin is not backed by anything. Its value is purely determined by the people who believe it has value and therefore use real money to buy it.
The only thing bitcoin needs to help control its value is scarcity. There is a finite amount of bitcoin in the world – although not everything has been made available. The idea is that bitcoin not only has a fixed amount, but it is also increasingly difficult to obtain.
Investors recently decided that cryptocurrency is a good place to invest in times of economic uncertainty. The reasons for this vary, but the main reason is that these decentralized currencies provide better returns when companies are bailed out and government-controlled currencies are devalued due to falling interest rates.
In a sense, investors think of bitcoin and its ilk like gold. However, unlike gold, bitcoin is not backed by any physical commodity and therefore can lead to greater fluctuations in value.
What are the advantages / disadvantages of bitcoin?
|Very accessible – cryptocurrency exchanges make it easy to buy bitcoin||Unregulated – the use of bitcoin itself is unregulated, leaving you legally unprotected if something goes wrong.|
|Very liquid – easy to cash out and sell your bitcoin if you need the cash.||Limited practical use – you cannot use your bitcoin to buy things. It must first be converted into regular money.|
|Potentially high returns – bitcoin tends to peak at extremely high prices.||Extremely volatile – bitcoin prices can drop very quickly and reach very low prices.|
|Security – you always know where your bitcoin came from and where it is going.||Security – transactions cannot be canceled and your bitcoin cannot be recovered if it is stolen.|
Should you mine for Bitcoin?
If you are relatively tech savvy, mining bitcoin for yourself is another alternative. It takes a bit of effort, but is popular with those who aren’t as interested in just buying bitcoin and waiting for the price to rise.
Bitcoin mining is necessary to bring fresh change to new investors, which can be very lucrative for people who are mining.
That said, you do need a lot of computing power to mine any amount of bitcoin. This means that you will be using a lot of electricity each month. The additional amount will vary depending on the size of your operation, but the BBC reported that the global mining effort consumes the same amount of energy as Switzerland each year.
In other words, you might not be spending money on buying bitcoin if you try to mine it – you will most likely pay it through your electric bill.
Should you invest in bitcoin?
From a practical standpoint, bitcoin is no different from any other high risk investment. This means whether you should invest in it or not depends on your own risk profile and your investment objective.
However, you must also accept that the value of bitcoin is determined solely by the interest of investors. Unlike investing in something else, cryptocurrency is not tied to any tangible asset. The whole value of Bitcoin is based on people thinking it is valuable.
Economist David Rosenberg points out that peak prices in 2020 are a huge bubble driven by a herd mentality. He also points out that most investors and economists really don’t know anything about bitcoin, how it’s mined, or even who made it.
In other words, if you want to invest in bitcoin, go for it. Treat it like any other investment and avoid trying to time the market. Instead, it’s probably best to make periodic investments to even out your returns.
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