What is Bitcoin? What You Need to Know About BTC?
What is Bitcoin?
Created by an individual or a group of people going by the alias Satoshi Nakamoto in 2009, Bitcoin is the first-ever new-age, blockchain-based virtual currency now known as cryptocurrency. The advent of Bitcoin introduced the concept of blockchain and led to a subsequent flood of cryptocurrencies in the market.
Essentially an online or digital version of cash, just like traditional currencies, Bitcoin can be used to buy products or services such as booking hotels, buying furniture on Overstock, etc. It allows transactions to be made without the need of any middlemen such as banks. However, much of the fame Bitcoin has gained in recent years is more due to its price skyrocketing and its attractiveness as an investment rather than its use as an alternative to currency.
Characteristics of Bitcoin?
The advent of bitcoin revolutionized the concept of virtual currency and has gained popularity due to some of its special and unique characteristics. As contrary to traditional currencies Bitcoin is:
This means that it is not governed or regulated by a single authority, government, or central bank. Rather enjoys freedom in the area and is controlled by the protocols of supply & demand. People are especially attracted to the currency as due to the lack of middlemen, they can avoid hefty fees, especially the fees attributed to international payments.
The currency is entirely virtual and has no physical counterparts. Like most of its successors, Bitcoin revolves around a blockchain concept, which is essentially a publicly available ledger. Anyone can view the ledger for verification of the authenticity of transactions.
The ownership of Bitcoin conforms to a wallet ID instead of an individual’s name and his bank account. Hence, Bitcoin allows some anonymity to its owners and will enable people to buy merchandise anonymously. As every transaction is transparent as well, that means every transaction can be tracked. However, as the wallet ID’s are random and do not contain personal information, no one would know who the wallet ID’s belong to unless they are explicitly told.
Highly regarded by Elon Musk:
Elon Musk’s richest man has, time and time again, expressed his positive expectations from cryptocurrencies and especially Bitcoin. He once told users of an online social media app that Bitcoin is a ‘good thing’. He even went as far as to change his Twitter bio to “#bitcoin”. Due to his wealth and influence, he has caused significant movements in the values of cryptocurrencies. His endorsements and comments resulted in a substantial rise in the value of Bitcoin. Recently, he tweeted that now cars from his company Tesla can be bought through Bitcoin. Due to his repetitive support, ability & Bitcoin inclusive activities, people have even started attributing Elon Musk to be the man behind Satoshi Nakamoto’s alias.
Bitcoin has a finite amount:
There are only 21 million bitcoins that can be mined in total. Once bitcoin miners have unlocked all the bitcoins, the planet’s supply will essentially be tapped out. The scarce and fixed amount helps control its value following the fundamentals of demand & supply. It is becoming increasingly challenging to obtain Bitcoin, hence again adding to its value.
Bitcoin’s capacity of being unrelated to and unaffected by most systemic risks has gained investor interest. Investor’s are viewing it the same as gold, as a haven during economic uncertainties. This aspect was proved during the Covid-19 pandemic when stock markets worldwide were dipping; Bitcoin remained unaffected. Bitcoin and most cryptocurrencies offer better returns when such events occur when businesses fall, and government-regulated currencies are devalued due to reductions in interest rates. Unlike gold, bitcoin does not correspond to any physical commodity and can lead to more significant swings in value.
Highly liquid & Secure:
Bitcoin is very liquid due to its high demand, it’s easy to cash out and sell your bitcoin if you need money. Hence, defeating the traditional investments, bitcoin has the characteristics of both high returns and high volatility. Making it very attractive in the eyes of the investors. Moreover, it is very secure; you always know where your bitcoin comes from and where it goes.
Like every investment where there are pros, there are cons linked, and sometimes the same aspect of something positive in the perception of one could be negative in the eyes of the other. The following are some of the negative aspects of Bitcoin:
Bitcoin is Unregulated:
The use of Bitcoin is unregulated due to its characteristic of decentralization; it has no governing or regulatory authority above it. This means if any mishap were to happen, Bitcoin holders have no legal protection in the matter.As a result, you could stand exposed to fraud and malpractice.
Bitcoin is highly volatile:
Due to its highly volatile nature, bitcoin prices can rise and drop very quickly and reach meager prices. The advent of bitcoin brought a flood of new cryptocurrencies to the market. Bitcoin and cryptocurrency trading are relatively young, and new coins are gaining momentum every day. This makes the already volatile market all the more unpredictable.
On December 17, 2017, one bitcoin had a value of $20,000. Just a few weeks later, its valuation plummeted to $7,051. The bitcoin and cryptocurrency market, in general, is constantly changing. With such an unpredictable market, you can hardly get a good return on your investment. To avoid huge losses, the market must be kept under strict vigilance.
Andrew Bailey, head of The Bank of England, expressed his concern regarding this topic, saying that he was “very nervous” about Bitcoin being used as a medium for transactions due to its volatile nature as its price could plummet at any time.
Bitcoin has security concerns:
it is impossible to reverse transactions once the payment has been made, and your bitcoin cannot be recovered if it is stolen. The threat of online hacking is a big one that investors need to consider. Since digital currency is entirely online, it is liable to hacking and theft of all your investment. Moreover, bitcoin held on exchanges isn’t insured by the FDIC. Therefore, anything is possible.
Bitcoin Wallets can be lost:
A simple hard drive crash or virus affecting an investor’s wallet can potentially wipe out your stash of bitcoin with no recourse. You can go from a wealthy to a bankrupt investor within seconds with no way to recover. This is a severe concern that investors need to keep in their mind.
To conclude, buying bitcoin carries some well-known risks. Essentially bitcoin investment is similar to other high-risk, high-reward investments. This means whether or not you should be investing in it depends on your risk profile and your investment goal.
The peak prices bitcoin has reached in recent years is highly speculative. Economist David Rosenberg points out that the peak prices in 2020 are a massive bubble driven by a herd mentality. Bitcoin may be too over-valued to be considered a good investment. With that said, whether the currency will prove to be a significant investment or just a passing storm is hard to predict, and in the end, it all comes down to your appetite for risk.