Bitcoin – a bright future or a big bust?

It’s a topic that’s so hot, it’s burning – Bitcoin. It’s controversial and it has many in the finance world divided. But, what on earth IS Bitcoin? We’ve unpacked the Bitcoin concept and explored some of the criticisms and commendations this cryptocurrency has generated in its short life, thus far.

Bitcoin defined

Bitcoin is a cryptocurrency that operates within a decentralised peer to peer computerised network. It is completely intangible.  Meaning although it is a currency, there is no physical money – no notes and coins. All Bitcoin transactions take place digitally and anonymously, with no central authority – essentially, cutting out the middle man. Bitcoin is purchased using ordinary currency, such as the Australian dollar.   It can then can be paid to someone else using a peer to peer networked computer, with no bank necessary to make that transaction.

The Bitcoin mechanics

Critics agree that the real innovation of Bitcoin is the blockchain, the technology that underpins cryptocurrencies and makes transactions possible.

The biggest roadblock for Bitcoin in the beginning, and indeed other cryptocurrencies, was the issue of double spending. Because a digital coin is literally just a computer file, it could be copied, reused and sent to various other people.  Thus making a safe and standardised system impossible to implement.

Enter the blockchain technology. The blockchain is a public ledger.  It records all transactions ever made in that currency and maintains a record of what user owns what coins. The blockchain is a direct exchange system. On completion of a transaction, it is added to the blockchain.  It is then confirmed by consensus of all computer users monitoring that currency’s network. Every new transaction is in the form of a block and is permanently linked to the previous transaction, and the next.

Transactions cannot be manipulated, changed or duplicated as doing so would affect the blockchain and alert the network of users.

The blockchain has been exciting in the financial world, and indeed, the digital world.  It creates a solution not just for digital currencies but the potential to create direct exchange and ‘cut out the middle man’ in many industries.

What is the value of a Bitcoin?

The value of a Bitcoin is speculative. Similar to how stocks are priced. What people will pay for it helps determine the value of a Bitcoin. Lots of people buying in can push the value up and if everyone sells, prices will plummet. Unlike other currencies, where there is a central authority controlling the supply, bitcoin value is up to interpretation.

An important point to note is that Bitcoin protocol states that only 21 million bitcoins can ever be mined.  As of February 2018, there was already 12 million mined so far. The limited supply of bitcoin is similar to gold or other precious metals and it is this scarcity which drives the value of bitcoin, although there is no real fundamental value.

How can I buy Bitcoin and what do I do with it?

Online currency exchanges offer buy, sell and store Bitcoin services. You can buy Bitcoins using, for example, Australian dollars from online exchanges –  or you can create brand new bitcoins in a process known as mining.

Once you have Bitcoin, just like you would with cash, you can choose to either spend it, sell it or hang on to it. It’s not just Bitcoin either – there are more than a thousand other cryptocurrencies. Some major retailers that accept Bitcoin include Expedia, Shopify stores and Microsoft. In Australia, Boost Juice recently got on board the Bitcoin train, offering their customers the chance to win Bitcoins through competitions on their app and website.

The risks and the benefits

So, what is in it for investors? Critics have been vocal, calling Bitcoin a bubble and predicting it’s heading for doom. Supporters label it life-changing, with potential to turn small investments into large profits.

According to commentators, Bitcoin is fairly risky. The financial value of bitcoin is highly volatile and very difficult to predict, with wild swings in pricing on any given day. Another criticism of Bitcoin is the anonymity of transactions. Bitcoin buyers don’t have any real idea who is selling to them and sellers don’t know who is buying. This anonymity can open up possibilities of criminal activity, like money laundering.

Theft is another risk when trading in bitcoin. Hackers have taken bitcoin before and will surely do it again.  Unlike interacting with banks, there is very little recourse for chasing refunds with cryptocurrency like Bitcoin.

Once your transaction hits blockchain, it is final. Bitcoin is new and it’s decentralised which leaves a lot of grey area and much murky unknown. The rules of the game are still evolving and that in itself is risky. Essentially, all the bitcoin players, even the longest standing online exchanges, are start-ups that are still developing and with that level of newness, comes risk.

Bitcoin seems to have its advantages too and is widely commended for its peer to peer system which presents payment freedom, with no third-party interruptions or involvement. The innovative blockchain technology is heralded as a huge advancement in the digital world and keeps information completely transparent.

Bitcoin purchases do not have sales tax applied.  Unlike traditional wire transfers and foreign purchases, Bitcoin transaction fees are very minimal. It is global and intangible, meaning all the user needs is internet access. Further, no personal information is required to make payments, unlike purchasing with credit cards or bank accounts, protecting against identity theft.

The jury is out on Bitcoin as an investment and it’s a wait and see approach as this new cryptocurrency technology continues to make its mark on the financial landscape.

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