To the uninitiated, trying to get your head around cryptocurrency is a bit like a parent trying to decipher a text message from a teenager – everything seems a little lost in translation.
So if the recent news reports have left you thinking ‘WTF is bitcoin?’ – don’t worry, you’re not alone.
Plenty of people have been contacting me recently, wanting to know more about the digital-based currency and whether it is worth investing in.
Bitcoin has been around since 2009 when it was created by an unknown computer programmer using the alias Satoshi Nakamoto.
But it has been frequently hitting the headlines in recent months as prices surged upwards before reaching a record high on September 1, when one Bitcoin was worth nearly US$5000. As my kids would say … OMG!
Bitcoin is one of the world’s earliest decentralised digital currencies.
This means it does not have a central repository or single administrator, unlike physical government-issued currencies.
The “virtual money” is instead created when computers are used to solve complex mathematical problems. Bitcoin is stored electronically and transactions take place online between users, with no or low transaction fees because they are not processed by a bank.
All transactions are recorded publically in an online ledger called a “blockchain”, however the system still offers anonymity for its users as transactions are not linked to a person’s name but instead to the unique ID of their “digital wallet”.
Each wallet is kept either on the user’s computer hard drive or in the cloud and includes all the information necessary to access and spend their bitcoins.
Now while this may still sound like techno babble, Bitcoin does have real-world applications.
In 2010 one of the first retail Bitcoin transactions saw a computer programmer in the US trade 10,000 Bitcoins for two pizzas.
These days more than 100,000 merchants around the world accept payments via Bitcoin, allowing you to purchase everything from a cup of coffee to a plane ticket with the cryptocurrency.
There are also increasing numbers of special Bitcoin automatic teller machines popping up both here and overseas, with the first ATM in Australia being launched in Sydney in 2014.
A joint venture between ATM provider StarGroup and blockchain service provider DigitalX has also just been announced, which will see 2900 existing ATMs across Australia modified to allow users to buy and sell the digital currency, as well as instantly convert their Bitcoins into cash to withdraw it from the machine.
Digital currencies such as Bitcoin are also gaining popularity in developing countries where there is limited access to, or distrust in, financial institutions.
With increasing numbers of people investing in and trading the cryptocurrency globally, it is clear bitcoin is here to stay – at least for now.
But for those considering making the leap into world of digital currency, it’s still a case of buyer beware.
While it’s easy to get swept up in stories of those early investors who have apparently made millions on the back of the record price rises, you still need to apply the same caveat emptor that you would when adding any new element to your portfolio, AKA risk versus reward.
Like other currencies, Bitcoin has no intrinsic value – it doesn’t generate income like property or shares. Instead, investors rely on the price going up.
In 2014 US academic and financial author Mark Williams reportedly said Bitcoin’s volatility was seven times greater than gold, eight times greater than the S&P 500, and 18 times greater than the US dollar.
Since coming into circulation in 2009 the cryptocurrency’s value has greatly fluctuated both up and down, although 2017 has been a milestone year in the market, with Bitcoin reaching record highs month after month.
While investors still speculate they can sell it to someone else for a higher price than what they purchased it for, you need to consider whether this possible future outcome seems like a gamble worth taking.
If you’re still keen to see where it goes despite the uncertainty, consider only investing a small amount that you can afford to lose – after all, YOLO.
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