What is bitcoin?
Bitcoin is a digital payment system with no intermediaries or banks; it was invented by a person or group using the alias Satoshi Nakamoto, and released as open-source software in 2009. The U.S. Treasury has categorized it as a decentralized virtual currency though some believe it is best described as a "cryptocurrency."- "a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank."Bitcoin uses blockchain technology to record its transactions. It's a publicly distributed ledger for certain financial transactions. It is currently mostly used for bitcoin, but many believe it could be used in a wide variety of financial applications in the future.
The benefits of this system are that it is transparent, secure, and streamlined, so that there are less parties involved in facilitating each and every transaction. Even as the existing payments system becomes ever more convenient and secure, the space is still littered with middle parties taking a small amount from each transaction. These players include payment processors, payment networks, issuing banks, and acquiring banks. The dream of bitcoin and other monetary systems based on blockchain technology is for payers to be free of these inherent costs of exchanging currency for goods.
The potential problems with investing in bitcoin
First, it is not backed or regulated by the government or other entity. This stands in stark contrast to all other forms of currency used around the globe. So, many people view bitcoin as something akin to Monopoly money, because it is neither a fiat currency nor is it based on something of tangible value like gold. In other words, a bitcoin is worth exactly what people perceive its worth to be. While, in a sense, this is true of any currency, the value of a bitcoin is much more fickle than other forms of currency because of its unregulated nature.Second, bitcoins are not traded on Wall Street. They cannot be bought or sold through a brokerage. Instead, one must set up a bitcoin "wallet," something like a bank account exclusively for bitcoins. Once this account is set up, its holder can link to a traditional banking account and use those funds in local currency to buy and sell bitcoins.This means bitcoin is much less liquid than traditional equities, creating more volatility and wild swings. For instance, in the past month alone, the value of one bitcoin fell from prices over $2,500 to under $2,000 before regaining all-time highs over $3,400. Those are incredibly volatile swings within one month -- something virtually unheard of with any other type of currency!
Finally, the unique way of buying and selling bitcoins not only contributes to its less liquid nature, but has also contributed to higher rates of fraud and theft through uninsured bitcoin exchanges. Also, one should note that none of the bitcoin exchanges have yet established a long business track record.
Where do the price and value of bitcoin go from here?
Unfortunately, no one knows. Many believe, bitcoin could fall anywhere -- from being known as a worthless experiment, to being the greatest disruptive force the financial industry has ever seen.If friends wanted to purchase a small, speculative position in bitcoin, I wouldn't try to talk them out of it. However -- and I cannot stress this enough -- nothing should be invested in bitcoin currency that an investor isn't comfortable losing.
