What is Bitcoin?
Bitcoin is a cryptocurrency, a form of electronic cash which can be spent peer-to-peer.
It was launched in 2009 by an anonymous person or group known as Satoshi Nakomoto, pioneering a new technology called blockchain technology. Unlike a traditional information network, which stores data in a centralized location, blockchain networks are decentralized and store data across many different computers called ‘nodes’.
The Bitcoin network is essentially a ledger containing a record of all Bitcoin transactions made since 2009, the network launch. There are thousands of nodes, which anyone can operate anonymously. Nobody owns or controls the Bitcoin network, and updates to the software are accepted by community consensus.
More nodes makes for a more secure network, as to alter the ledger, one would need an incredible amount of processing power, making Bitcoin virtually invulnerable to censorship or attack.
Bitcoin is stored in Bitcoin Wallets. These can be software applications, or physical hardware wallets. In each case, the wallets are cryptographically secured, and to send ‘bitcoins’ or ‘BTC,’ users need to have access to a passphrase called a ‘private key’.
Bitcoin has a strong use case as an alternative to government-backed fiat currency when it comes to making digital payments. E-commerce merchants often accept Bitcoin as well as currencies like the US dollar, and you can use Bitcoin to invest in gold and silver.
Due to the high volatility seen in Bitcoin’s price action, the cryptocurrency is popular among traders, particularly swing traders and day traders capitalizing on major inter-day or intraday price movements.
Store of Value
Bitcoin’s use case as a store of value is controversial due to the price volatility. Where movements of 1 – 2% in the precious metals markets raise eyebrows, it’s not uncommon for Bitcoin to move 10% in a single day, and several major crashes have occurred in the decade or so since the launch of the network, often lasting years.
However, on a long-term scale, Bitcoin has usually proven to be a very lucrative investment. In fact, analysts have listed Bitcoin as the best-performing asset class of 2019, with 60% growth in less than two months.
The inclusion of a moderate Bitcoin investment in a diverse portfolio has also been shown to increase the Sharpe ratio of that portfolio and actually reduce volatility. Of course, there is no guarantee that Bitcoin’s price will continue to increase as it has done in the past.
Bitcoin Price History
Bitcoin is known for its price volatility, and has undergone numerous dramatic price swings since its launch.
Bitcoin went public in 2009, and people begin “mining” new units of currency by running special network nodes called mining nodes.
Bitcoin is traded for the first time, peer-to-peer on a Bitcoin forum. An early developer uses it to pay for a pizza delivery in order to demonstrate its use case as a currency, spending 10,000 BTC on two pizzas.
2011 – 2012:
Bitcoin reaches and exceeds parity with the US dollar, hitting a value of around $31 per bitcoin in June 2011 before crashing to less than 10% of that value, where it remains for much of the following year.
Bitcoin rises to $1000 per BTC before crashing to $300, leading to widespread speculation that the currency had collapsed permanently.
The price continues to flounder. Meanwhile, tech giant Microsoft begins accepting BTC as payment.
2015 – 2016:
Bitcoin’s price recovers to $770 in June 2016, ending rumors of the currency being dead – for a while.
Bitcoin gains more mainstream awareness, and increased demand leads to a massive price spike from under $1,000 to around $20,000.
Bitcoin’s price plunges again, continuing a rapid drop in December 2017, and leading to yet more speculation of a permanent bubble burst. Prices tanked after January, falling over 50% by April. It’s been speculated that this fall was due to the launch of a Bitcoin futures market. By the end of the year, prices were as low as $3,200.
Now a widely accepted commodity and a common feature of mainstream financial news reports, Bitcoin adoption and awareness continues to grow. The price recovers and stabilizes to $10,000 by mid 2019.
Bitcoin Pros and Cons
A number of elements distinguish Bitcoin from other stores of value, commodities, and currencies. While it has a strong use case, there are advantages and disadvantages to the technology.
There is a limited number of bitcoins (21 million), and all funds have a digital signature that cannot be replicated. Because the blockchain record is immutable and cannot feasibly be hacked or altered, it is essentially impossible to counterfeit Bitcoin.
24/7 Operation Schedule
Bitcoin is constantly running. Service on the network is not restricted by times, time zones, bank holidays – there are no interruptions, and value can be sent and received within minutes at any time.
No Third-Party Interruption
Banks, governments, and other third parties have no control over the funds on the Bitcoin network. As such, user funds cannot be frozen, and can only be seized if the third party gains access to their private keys.
Transaction fees on the network vary, and increase during periods of congestion – however, with no overhead costs, the fees are still lower than with wire transfers or other forms of international money transfer.
It’s not necessary to submit your personal information when setting up a Bitcoin wallet or transacting in Bitcoin. Technically, the network is said to be pseudonymous, rather than anonymous – if anyone can connect your personal wallet(s) to your identity, they can view every transaction you’ve made.
However, with proper online security you can achieve relative anonymity which offers far more protection of your financial data than traditional financial services which have often been hacked in the past.
Payments on the network are irreversible. This is beneficial to merchants, although is arguably a disadvantage for victims of theft.
Volatility is perhaps the most commonly-cited disadvantage of Bitcoin in terms of its use case as cash. Ironically, that very volatility helped grow the network, providing traders with very lucrative opportunities in short time periods. However, for those wishing to store value and transact Bitcoin as an everyday currency, the volatility is a major drawback.
Though rapidly becoming a household name, Bitcoin is not yet widely used as a payment method, and most merchants and service providers will not yet accept for their wares.
Low Buyer Protection
It might be more accurate to say “no buyer protection”. There are custodial services for those who wish to entrust a third party with safeguarding their funds, but otherwise, the user is solely responsible.
While it is spent online, Bitcoin is essentially like a form of cash in this regard – the person in possession of the funds is effectively the owner, and if the private keys which authorize spending are stolen, there is little recourse. While one can often track the movement of stolen funds on the blockchain, it’s impossible to reverse the transaction, making Bitcoin holdings a popular target for cybercriminals.
Easy to lose
Theft isn’t the only way to part with your Bitcoin. There are frequent reports of people losing the keys to their wallet, and again, this is much like losing cash - there is no way to recover the funds without the keys. It’s estimated that approximately 20% of all existing Bitcoin has been permanently lost. However, given that Bitcoin is a finite resource, some argue that this simply increases the scarcity and theoretical value for other investors.
Is Bitcoin ‘real’ money, and why does it have value?
Yes, Bitcoin is money. You can use it to buy certain goods and services, or, if you like, easily trade it for currencies like the US dollar on a Bitcoin exchange and spend that instead. Like any other currency, Bitcoin’s value is determined by what the free market thinks it’s worth.
Who controls the Bitcoin network?
Nobody owns or controls Bitcoin, which is one of the reasons it appeals to people. The network was launched by an unknown developer or developers, and then other volunteer developers continued to add new updates to the software, which anyone can now do.
Updates and other decisions are made by the ‘miners’. Miners use computers or specialized hardware to generate large amounts of computer processing power, and this is used to operate the network and process transactions. In return, they receive transaction fees. They will also receive freshly generated bitcoins until the last bitcoin of the 21 million BTC supply is ‘mined.’ At the current pace of mining, this will happen in the year 2140. If Bitcoin is still around, the miners will be incentivized to do their work for the fees alone, keeping the network up and running.
Is Bitcoin legal?
Yes. Bitcoin has not been made illegal in any country to date, although some nations restrict its use more heavily than others. Bitcoin is often associated with crime, because it can be used to make criminal transactions. However, this is true of any currency. Bitcoin is harder for authorities to trace than digital fiat transfers, but easier to trace than cash, and most criminal transactions in the world are made with fiat, not Bitcoin.
Where can I buy bitcoins?
You can purchase bitcoins on a cryptocurrency exchange, or by buying BTC directly from another investor. You can also earn bitcoins through mining.
Is Bitcoin a good investment?
Whether Bitcoin is a good investment for you depends entirely on your own preferences, risk aversion, and investment needs. Nobody can say whether Bitcoin, or any other asset, is a good investment with certainty. While the price crashes of the past have typically proven to be lucrative investment opportunities, past performance is not a sure indicator of future performance, and you must use your own judgement when making an investment.
Can I make money trading Bitcoin?
You can make money trading Bitcoin – you can also lose it! Many people monitor Bitcoin’s price action through charts and either purchase BTC or buy BTC futures contracts which allow them to open long and short positions on Bitcoin. Trading such a volatile currency can be profitable, but is undeniably risky.
You can also use Bitcoin for further investment opportunities. You can buy gold and silver through JM Bullion with Bitcoin here.