While I’ve known about Bitcoin for the last few years and watched it rise in price from a couple hundred bucks, I never took the time to learn about it.
It’s meteoric rise in price has grabbed enough attention that the Chicago Board Options Exchange and Chicago Mercantile Exchange have each created futures contracts to begin trading tonight (the CBOE contract) and next Sunday evening (the CME contract).
With that in mind, it will be more accessible to traders and investors.
I’m writing this post to not only educate some people about Bitcoin, but also myself.
What is Bitcoin?
So what the hell is this thing called Bitcoin?
Well, according to Bitcoin.org, Bitcoin is a consensus network that enables a new payment system and a completely digital money. It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen. From a user perspective, Bitcoin is pretty much like cash for the Internet.
Bitcoin is the first of the cryptocurrencies, and was reportedly created by Satashi Nakamoto in 2009. The community has grown substantially since, and many developers continue to work on Bitcoin. It is unknown whether Satashi Nakamoto is an individual, or group, but they left the network in 2010.
As an open source software, where any developer can contribute to its development, Bitcoin is actually a bit like the WordPress software on which this blog is developed.
According to Bitcoin.org, nobody owns the Bitcoin network, and the network is controlled by all Bitcoin users.
How does Bitcoin work?
Bitcoin is essentially a mobile application or computer program that provides a user with a Bitcoin wallet and the user is able to send and receive Bitcoins with that wallet.
Behind those applications is a network that shares a ledge called a “block chain.” This ledger apparently contains every transaction ever processed and the authenticity of these transactions is protected by digital signatures corresponding to the sending addresses. Additionally, you can “mine” Bitcoin by processing transactions using the power of specialized hardward.
Bitcoin is becoming more popular and gaining more acceptance by both individuals and businesses alike. Even online services such as Namecheap, Overstock and Reddit are accepting Bitcoin.
Its rapid acceptance in recent months has sent the total value of all existing Bitcoins to well over $100 billion.
You can acquire Bitcoin in a few different ways. You can acquire Bitcoin as a payment for goods or services you provide. You can purchase Bitcoins on a Bitcoin Exchange. You can exchange Bitcoins with someone else. And finally, you can earn Bitcoins through mining.
So that is a very brief description of Bitcoin. It’s basically a new way of paying for goods and services without the need for a bank, or even a central government.
Why it is appreciating so quickly in value is anyone’s guess. Perhaps it is the lack of confidence in central governments and banking systems to provide stability to their constituents.
Or, perhaps it is a simple supply and demand issue. I’ve read that most Bitcoin is owned by a very small number people. Furthermore, the reward for mining Bitcoin constantly decreases, so that ultimately, there will only be a total of 21 million Bitcoin in existence.
As a result of the artificial scarcity buit into its development, some people have predicted that the value of a Bitcoin will reach as high as $1 million down the road.
This wild price appreciation has many people wondering whether they should now invest in Bitcoin themselves.
Should you invest/buy Bitcoin now?
I would argue that at this point you should avoid buying or investing in Bitcoin at the current time. The price action in Bitcoin has all of the characteristics of a market bubble.
While there will ultimately be a finite supply of Bitcoin, there are quite a few other cryptocurrencies in circulation that provide competition and it is likely that more cryptocurrencies will be developed. High prices will lead to greater supply and competition.
With all of the hype surrounding these cryptocurrencies, I am reminded of the Dot.com bubble back in the late 1990’s. We are seeing ads all over the internet now for the next great cryptocurrency to make you a millionaire. That’s a flashing red light in my view.
With that said, given how new the technology is, and that futures trading is only now just beginning, the best course of action is to take a wait and see attitude toward Bitcoin and the other cryptocurrencies.
The development of Bitcoin and the other cryptocurrencies such as Ethereum and Litecoin is certainly exciting. However, given the recent price history and hype surrounding this technology, the risk in buying Bitcoin is simply too high for most individual investors due to the price volatility.
The fact is, the big money has already been made by the early investors. The key now is to see if there is staying power for this stuff. As such, it is probably a better idea to conduct some significant research into some of the cryptocurrencies, or businesses that may be involved in developing the technology.
The introduction of futures contracts will hopefully reduce the overall volatility in the market for Bitcoin, and then it will make more sense for individuals to add Bitcoin to their portfolios.
Ultimately, it looks like cryptocurrencies are here to stay, but it will be a matter of time to see which will be the market leaders and have staying power.
So there you have it…a few thoughts on this phenomenon known as Bitcoin. While it has certainly be fascinating to watch its rise, my experience tells me that the risk in investing and trading in Bitcoin at this point in time is simply too high.
Feel free to send me your thoughts and comments!