If you are into investments and Cryptocurrencies, I’m sure you have come across Bitcoins. And perhaps you have the same question as mine which is: Should I invest in bitcoins? Is Bitcoin a good investment?
More than a year ago, I started investing in the Philippine Stock Market and I am so glad I did, because I see how my hard-earned money is working harder for me. But since I am an investor, not a trader, I find this to be really boring. Unlike traders, especially day traders, I buy shares of stocks only once or sometimes twice a month and forget about it until it’s time to add some shares again.
And because I got bored, I started looking into other investments and investment vehicles to make my money grow. That’s when I heard and read about Bitcoins and how it is said to be a better option than stocks. I am not surprised that even in the Facebook groups about stocks of which I am a member; they were flooded with posts and queries about Bitcoins.
So in this article, I will be sharing with you what I learned about Bitcoins. Hopefully it will answer your questions like: Is Bitcoin a good investment? What are the risks of investing in bitcoins? Should you invest in Bitcoins?
Bitcoins and the Financial Crisis of 2008
Bitcoin was created in 2009 by a certain Satoshi Nakamoto as a new method to overthrow the way we pay things online. Nakamoto thought there were certain problems with existing payment systems and wanted to address them. But rather than trying to design a new one, he created Bitcoin.
Why was there a need to create Bitcoin? It all started with the “Financial Crisis of 2008.” The said crisis brought out the inherent shortcomings of banks and other financial institutions. In the USA, banks started to give out risky loans to people to attract customers. But because of the inability of the people to pay back the money, many banks collapsed and filed for bankruptcy.
Some banks invested the people’s money in various opportunities but these investments did not pay off, resulting in the loss of all the money that the people had entrusted to them for safe-keeping. So what the government did was asked the central bank to print more money.
Although printing more money has helped the country’s economy, the downside is that the value of money that was already in circulation decreases. The 2008 financial crisis was global; whatever happened in the USA also affected the world. As a result, people everywhere would have to work for the rest of their lives to earn money so that the decrease in the value of money doesn’t affect them too much.
“Whenever the government spends more money than it earns, the value of our money goes down.”
After the crisis, people started to demand for a currency that would not be controlled by a central authority. Satoshi Nakamoto decided it was time for a new monetary system and created Bitcoin.
What is Bitcoin?
Bitcoin is the first ever DIGITAL CURRENCY to run on a DECENTRALIZED DATABASE.
So first, Bitcoin is a currency. Just like the Dollar, Pounds or Peso, you can exchange your money into Bitcoin, and Bitcoin into other currencies. Secondly, it is digital, the same way that your money in your online bank accounts, in your credit cards or stock investment portfolios are all digital.
But just because something is digital doesn’t mean it isn’t real. Today, we live in a world where we can purchase digital and physical products by just typing in your credit card details.
But what makes Bitcoin special is that it operates on a decentralized database. Before we define what decentralization means, let us first look at what is a centralized database.
“Bitcoin is the first ever DIGITAL CURRENCY to run on a DECENTRALIZED DATABASE.”
Banks operate on a centralized database, which means when you deposit your money to a bank (the database), you’re gonna have to trust the person (or system) that they will properly track all the money and transactions given.
However, you don’t have any guarantee that you will get your money back. You may have your deposit slip but if you lose it or if the teller (or system) steals your money, you are literally at the mercy of the bank because it runs on a centralized database.
At the end of the day, the power to decide the truth on what really happened falls under just one person or institution and the consumer just has to trust the system.
Decentralization on the other hand means that instead of having all the records of transactions in just one single database, it would be spread across entirely many databases, and will not be controlled or owned by one single person or group.
You can Never Fake a Bitcoin.
Because Bitcoin operates on a decentralized database, verification isn’t controlled by one single person, group or institution. Also, any transaction can be publicly verified and validated by anyone, and no record can ever be faked or altered once verified by the decentralized network. That’s why you can never “fake” a Bitcoin
Since its inception, every Bitcoin transaction can be tracked in a publicly verifiable database. It means each Bitcoin or its fraction can be traced back to the owner and to where it went next. Consequently, all future transactions with Bitcoin are being tracked and verified by the same decentralized database.
So to create a fake Bitcoin, you will have to fake all the transactions since its inception in 2009. And as time progresses, faking a Bitcoin transaction is next to impossible because to do this, you would have to beat the processing power of the entire network. And even if you can create a fake transaction, the network is sure to reject and void it within just 10 minutes.
How does Bitcoin Work?
As defined earlier, Bitcoin is the first digital currency that operates on a decentralized database. But in order to understand how Bitcoin works, we must first understand how currency works.
Currencies like the dollar or peso function primarily as a “medium of exchange,” which means they are accepted as a means of paying for goods and services. However, Bitcoin is not yet accepted as a medium of exchange, as there are a limited number of people and establishments who are accepting Bitcoin as payment.
If that’s the case, why would anyone be interested in Bitcoins? Because Bitcoin was designed to be the “perfect money.” For you to send and receive Bitcoins, all you need to have is a “Bitcoin Wallet,” an app that can be downloaded into your computer or mobile phone. One good thing about Bitcoin is that you don’t even need to give your name, email, contact number or any valid identification to start using it.
Bitcoin acts exactly like digital cash and it is by design, superior to any digital money when it comes to portability. As of last month, (February 2018), some noteworthy companies accepting Bitcoin are Microsoft, Expedia and Shopify. But little by little, more and more companies are starting to accept Bitcoin as payment.
Is Bitcoin a Good Investment?
Should you and I invest in Bitcoins? In order to answer these questions, let us compare Bitcoin with other investments like the stock market in terms of risks and returns.
In August 2011, the (first) price of Bitcoin was only US$0.06. Five years later in August 2015, one Bitcoin was already US$260, which is a whooping 433200% return on investment. Then in January 2017, Bitcoin was $985. But by the end of the year (December 2017), it was already at $17500. That’s a 1676% return!
Based on this, Bitcoin can be considered as a good investment. But before you dive in, you should know that while Bitcoin has been increasing in value over time, there have also been a lot of huge drops throughout.
To compare, the worst years ever in the US and Philippine Stock Markets based on a 30-year history was a drop of 52.7% in the Dow Jones Industrial Average (DJIA) in 1931 and 55% in the Philippine Stock Exchange Index (PSEI) in the year 1990 & in the 2008 crisis. But with Bitcoin, drops of more than 50% happen on a regular basis.
This simply means that Bitcoin should be treated as an extremely high-risk, high-reward investment. Yes, the gains are potentially high but the investor could also potentially lose all their investments.
Should you and I invest in Bitcoins? Only if we can afford to lose our investments. I’d say Bitcoin is for people who:
- are debt-free.
- have health and life insurance.
- have 6 months to 1 year worth of emergency funds.
- have savings and investments for their children’s educational fund and their retirement.
Anyone who doesn’t have a solid financial foundation yet should not invest in Bitcoins. Instead, you must focus on building your financial foundation so that in the future you can afford to take risks and speculative investments like Bitcoin.
If you are already investing in Bitcoins, please do share your experience in the comment section below.