Which asset has no physical form, is loved by organized crime, and has gained 3 million percent since 2010?
Bitcoin, the world’s most popular cryptocurrency.
If you still don’t know about Bitcoin, expect to get used to hearing about it. The price of Bitcoin has exploded—gaining over 70% this year alone. Five years ago, a single Bitcoin was worth around $5. Now, that same Bitcoin is worth about $1,900. But what is Bitcoin and why has it gained so much value? Let’s find out.
What is Bitcoin?
Bitcoin is an open-source cryptocurrency—a digital store of value. Unlike cash, which is guaranteed by governments, Bitcoin is backed by an open-source algorithm. That means everyone knows how Bitcoin works, but nobody directly controls it. Like cash or gold, Bitcoin is a currency, but since it is totally digital, it allows users to make anonymous payments with virtually no transaction fees.
While these underlying mechanics can be hard to get your head around, the result is simple: a digital store of value that allows for fast, anonymous payments. This innovative design has made Bitcoin popular with a motley group of futurists, libertarians, and some organized crime.
What are Bitcoin’s advantages?
Bitcoin allows you to send money anonymously. This makes it attractive to tax dodgers and drug dealers, but also people who want to purchase items without leaving a record. Bitcoin allows you to send large amounts of money to anyone anywhere in the world very quickly. This appeals to businesses or individuals who want to avoid transaction fees.
Perhaps most unusually, Bitcoin is not controlled by governments. Storing value in national currencies exposes you to the risk of inflation or a currency collapse, but Bitcoin may actually gain value if there is a currency crisis or economic depression. Bitcoin’s digital nature is also attractive to those who are skeptical of the banking system.
...and its weaknesses?
Although many people use electronic banking, it’s not the same as investing in Bitcoin. Cash deposits in the United States are FDIC insured up to $250,000. Bitcoin deposits are not insured.
And, since Bitcoin is all digital, it’s vulnerable to hackers. This isn’t just theoretical—there have been major hacks and thefts which have affected even sophisticated investors. Mt. Gox, once perhaps the most famous Bitcoin exchange, collapsed amongst theft and fraud allegations. And around $72 million in Bitcoin was stolen from a Hong Kong-based exchange in 2016.
The recent "WannaCry" hack, which has infected computers in over 150 countries, locks up computer systems until the hackers are paid a ransom in Bitcoin. Ironically, despite being perhaps the largest and most successful hack in history, the hackers have only made around $50,000, because few people understand how to use Bitcoin to actually pay the ransom.
What’s behind the recent spike in Bitcoin prices?
Although some have attributed the rally to the election of Donald Trump, Thomas Glucksmann, Head of Marketing at Gatecoin, a regulated Bitcoin and ethereum token exchange based in Hong Kong, says there’s more to it than that:, "With Japan officially regulating Bitcoin exchange activities, a swarm of institutional players in the country have flooded the market with liquidity, driving prices higher and ensuring that Japanese yen dominates the lion’s share of Bitcoin trading worldwide."
But is this trend sustainable? Experts disagree on the future of Bitcoin. Nir Kaissar, founder of asset manager Union Advisors, claims in an article on Bloomberg that, "Bitcoin has all the attributes of a bubble in the making," pointing out that Bitcoin is up 3 million percent since July of 2010. Yet Glucksmann argues, "there is no reason why the Bitcoin price would not surpass USD 3000 by the end of the year." He continued to point out that further regulation and normalization of Bitcoin "in the US, China and other markets may drive prices even higher in the coming years."
Should you invest in Bitcoin?
Although Bitcoin has matured since the early days, it is not an investment for the faint of heart. Bitcoin regularly sees wild swings in value, and if past is prologue, we can expect more volatility. You also need some technical knowledge to purchase and protect your Bitcoins. Since there is no government guarantee of their value, you should be prepared for the value of your investment to drop to zero—even though most observers think that is unlikely. While there is no such thing as a perfect investment, Bitcoin has proven doubters wrong for years. Whether that continues remains to be seen.