What you need to know about the bitcoin craze

11Jul 2017
The Guardian Reporter
The Guardian
What you need to know about the bitcoin craze

Bitcoin is a digital currency also known as a cryptocurrency created in 2009, in the wake of the 2008 global
financial turmoil. It enables payments between two parties without the intervention of an intermediary like a bankand is obtained by accepting it for a good or service.

 

It can also be acquired from an exchangewhereby real money is swappedfor Bitcoin at the current exchange rateor vice versa. Bitcoin users have theirpersonal address like a bank accountnumber and control all bitcoins’ inflowsand outflows from that address. Everysingle Bitcoin transaction is recordedin a public ledger referred to as blockchain.

Bitcoin PopularityWith regulators struggling to bringthe digital currency under control, itis considered illegal or proscribed in aslew of countries while some nationsare still observant about whether or notit should be ratified. As such, the Securitiesand Exchange Commission (SEC) inUnited States scorned the approval ofa Bitcoin ETF (exchange-traded funds),though stating in their report that it is acurrency at an early stage and its futureseems bright.

Quite interestingly, it has offeredroom for the scrutiny of Bitcoin’s ETFdisapproval. Although stomping in itsdebut, Bitcoin is gaining traction with ameteoric rise in daily transactions skyrocketingby 900 per cent over the lastfive years from 33,800 to over 335,000with reference to Coindesk.

There is an increasing number ofcountries authorising its use as a legalmeans of payment including Japan,Philippines and Russian authoritieshope to legalise it along with othercryptocurrencies as a financial instrumentby 2018. Interestingly, FidelityEmployees can use bitcoin to purchasefood at the firm’s canteen and there isalso bitcoin visa debit card facilitatingspending.

Moreover, Bitcoin ETFs and optionsare already available in some countries.The latter trade like call/put optionsin which the investor has the right butnot the obligation to buy/sell an agreedamount of bitcoin’s asset at a futuredate.

More striking, is that the iconic digitalcurrency experienced an astonishingrally for the first time in history onJune 11, 2017, shattering the US$3,000price level per coin. This has engendereda contentious feeling amid investorsin which some raised concerns asto the stability of that cryptocurrency,perceiving this record as a hoax sinceit cannot perpetuate whereas otheranalysts viewed it as a springboard formuch greater gains in the future.

Downside Although, the cryptocurrency hasrealised a spectacular performance sofar, everything is not rosy in the digitalcurrency world. With a surge in bitcointraders, transaction fees are increasinglybecoming sky-high and it takes nowsome days instead of minutes for transactionsto come through. Moreover,there is a myriad of other cryptocurrenciesover 200 including the two maincompetitors of bitcoin namely Ethereumand Kin that are wooing investorswho have started flocking to them.

Some provide specific investment inthe marijuana business and other cryptocurrenciesare under their way. All ofthese may cripple bitcoin’s success inthe years ahead. Adding to this concernis the fact that Bitcoin is digital, decentralised,not highly regulated and its investorsare anonymous, making the EUand some governments perplex aboutits use for terrorist financing, moneylaundering and other criminal activitypurposes.

It is also not immune to cyber attackslike any software especially with the recentransomware attack that has affectednumerous companies on a worldwidebasis and demanding bitcoin aspayment for unlocking the system. Oneof the long-standing critical issues isthat Bitcoin is extremely volatile.

For instance, its price recently slid by27 per cent in just a couple of days afterattaining an all-time high of US$3000in June 2017. Its price volatility is notuncommon and could be attributed tonews about security breaches, the announcementof a rise in the number ofnations poised to use bitcoins and thetax treatment underlying that digitalcurrency.

Bottom LineSince its creation, Bitcoin has jumpedover an array of hurdles from scepticismto rejection and at present time,it is becoming mainstream with its increasingrecognition by governmentalong with its use in business activities.Unequivocally, an individual whohas invested in this asset in July 2011at a price of around US$31 at that timewould have made today a blockbustergain, albeit enduring a lot of stress becauseof extreme price volatility and risingtransaction prices.

Thus, it is crystal clear bitcoin is notfor risk-adverse investors or the fainthearted,involving tremendous riskswith regular daily double-digit percentagevariation in price. Hence, oneshould weigh up the risks and benefitsassociated with this investment in lightof its objectives, risk tolerance and currentsituation to ascertain to whichextent bitcoin could suits him andwhether or not be incorporated in itsportfolio.

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