Bitcoin: The New Kid On The Block
Forget FOREX, there is a new buzz word in town called Bitcoin. Like it, love it, or confused by it, bitcoin and other cryptocurrencies have become impossible to ignore.
A quick explanation of a few words/terms before we begin:
Cryptocurrecy: is a digital money created from code. is a medium of exchange, created and stored electronically in the blockchain, using encryption techniques to control the monetary units creation and to verify the transfer of funds. Ok in simple English cryptocurrency is digital money! Below is a list of some of the well known Cryptocurrency
Bitcoin: First and most famous cryptocurrency, founded by Satoshi Nakamoto
Ethereum: The brainchild of young crypto-genius Vitalik Buterin and it has ascended to the second place in the hierarchy of cryptocurrencies
Litecoin: Litecoin was a real innovation, perfectly tailored to be the smaller brother of bitcoin.
Now Cryptocurrencies have
No intrinsic value in that it is not redeemable for another commodity,
No physical form and exists only in the network and
Its supply is not determined by a central bank and the network is completely decentralised.
One thing that fascinate me about Cryptocurrencies is that they offer a digital alternative to government-issued fiat currencies and can be used in online marketplaces to buy everything from a food to plane tickets.
Now let's move on to the star child Bitcoin. As mentioned above Bitcoin is a digital currency, its value is dependant on its demand and supply, i.e. if the demand goes up, the value also goes up and vice-versa. In January 2009, the bitcoin network came into existence with the release of the first open source bitcoin client and the issuance of the first bitcoins, with Satoshi Nakamoto mining the first block of bitcoins ever (known as the genesis block), which had a reward of 50 bitcoins. Bitcoin was not traded on any exchanges in 2009. Its first recorded price was in 2010. Technically, Bitcoin was worth $0 in 2009 during its very first year of existence! Bitcoin's price never topped $1 in 2010! Its highest price for the year was just $0.39. Currently Bitcoin’s worth is $14 936 making it equal to R190 000 as of 22nd December 2017. You probably asking yourself why is the price going up at this rate. The general answer to “why this price?” is “supply and demand.” Price discovery occurs at the meeting point between demand from buyers and supply of sellers.
Bitcoin is a scarce resource. What does this mean? “Bitcoin is difficult to extract, the mining system works by having computers solve complex mathematical problems. When a computer or several computers solve one of these mathematical problems correctly, they uncover a block. A block serves as a record of transactions. Each new block has a record of what took place during the minutes before it was created, as well as a reference to the block that came before it. The barrier of entry into mining is the energy (electricity) and computing power needed to solve these mathematical problems, uncover a block and get credited with the coins in it”. Again, in simple terms, it is difficult to mine bitcoins thus it would need a lot of training should anyone want to mine.
Nakamoto went even a step further and determined exactly how scarce bitcoin will be – once the 21 millionth bitcoin is mined, the resource will be exhausted and the economy will be left with a fixed amount of coins from now on.
Bitcoin are seen as a ‘virtual’ commodity, despite the fact that they used as a currency. Bitcoin production mimics mineral/industrial metal mining or oil extraction in the brick and mortar world, which means there are barriers to entry at the production level. Individuals are probably better off by entering the world of bitcoin through financial transactions rather than mining, especially given that bitcoin can be used as currency. Products and services that can be purchased with bitcoin are growing, making the demand for the currency more dynamic, while mining gets progressively more difficult.
Eventually bitcoin reserves will be depleted, and a fixed amount of coins will stay in circulation, just like other commodities. Before you attempt to enter any kind of bitcoin mining operation, keep in mind all the variables and draw an appropriate business plan. How does one begin to mine, what are the advantages and disadvantages of mining? We will try and answer such questions in the next article.
There are Bitcoin mining companies that offer people an opportunity to invest and promise weekly returns. They are mostly based in the UK. They will need a minimum investment of say $100 (R1274) with 15% returns or dividends per week for a certain time. So you invest the R1274 worth of bitcoins to them and they give R192 every Monday for 24 months (depending on the time they have set). Some companies promise to pay for 12 months, some for 24 months and some forever. This is how many people who cannot mine for themselves make money on Bitcoin trading. It is advisable that before anyone can make any invest on any company they do a thorough research about that company and confirm their track record in terms of paying out dividends. Remember, there is no legal controlling body that regulates these investments, therefore it is risky. The general rule is that If you want an investment that can give you a big pay-out, it usually comes with a big risk.
Bitcoin as digital currency
As mentioned above, Products and services that are purchased with bitcoin are growing. A lot of companies including audit firms like PwC and EY have started using bitcoins as a means of payments.
PressCoin reported - “In their quest to gain supremacy in the cryptocurrency ecosystem, the Big Four accounting firms (Deloitte, EY, PwC, and KPMG) are focusing their strategies and shaping their services to better respond to their customers’ demands. And, as a testament to Bitcoin’s status as an increasingly mainstream financial asset, PwC is following EY’s lead in accepting payments in Bitcoin”.
A headline on express.co.uk read “Bitcoin Futures top $18,000 (R229272): Cryptocurrency spike causes CBOE stock exchange crash TWICE. The Chicago Board Options Exchange (CBOE) launched bitcoin futures exchange last night and saw traders flocking to the exchange as well as the system crashing due to many investors overloading the system.
When the demand for bitcoin is going up the value goes up or vise versa, that means the price is also going up or down. Currently the value is going down as more people are selling their Bitcoins. There are lots of debate around bitcoins and other cryptocurrencies which we will look at in the next article.
In the next coming weeks I’ll write a series of articles with the aim to share information I have gathered on investing and mining bitcoins. Please note these articles is intended for purely informational purposes, and will not attempt to provide investment advice. The reader is solely responsible for any investment done on the basis of the information provided here.