June 28, 2017    5 minute read

What You Need to Know About the Bitcoin Craze

Just a Temporary Attraction?    June 28, 2017    5 minute read

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 bank and is obtained by accepting it for a good or service. It can also be acquired from an exchange whereby real money is swapped for Bitcoin at the current exchange rate or vice versa. Bitcoin users have their personal address like a bank account number and control all bitcoins’ inflows and outflows from that address. Every single Bitcoin transaction is recorded in a public ledger referred to as blockchain.

Bitcoin Popularity

With regulators struggling to bring the digital currency under control, it is considered illegal or proscribed in a slew of countries while some nations are still observant about whether or not it should be ratified. As such, the Securities and Exchange Commission (SEC) in United States scorned the approval of a Bitcoin ETF (exchange-traded funds), though stating in their report that it is a currency at an early stage and its future seems bright. Quite interestingly, it has offered room for the scrutiny of Bitcoin’s ETF disapproval. Although stomping in its debut, Bitcoin is gaining traction with a meteoric rise in daily transactions skyrocketing by 900% over the last five years from 33,800 to over 335,000 with reference to Coindesk (Figure 1). There is an increasing number of countries authorising its use as a legal means of payment including Japan, Philippines and Russian authorities hope to legalise it along with other cryptocurrencies as a financial instrument by 2018. Interestingly, Fidelity Employees can use bitcoin to purchase food at the firm’s canteen and there is also bitcoin visa debit card facilitating spending. Moreover, Bitcoin ETFs and options are already available in some countries. The latter trade like call/put options in which the investor has the right but not the obligation to buy/sell an agreed amount of bitcoin’s asset at a future date.

Figure 1: Bitcoin daily transactions from January 2009 to June 2017

Source: (Blockchain.info website, 2017)

More striking, is that the iconic digital currency experienced an astonishing rally for the first time in history on 11th June 2017, shattering the $3000 price level per coin. This has engendered a contentious feeling amid investors in which some raised concerns as to the stability of that cryptocurrency, perceiving this record as a hoax since it cannot perpetuate whereas other analysts viewed it as a springboard for much greater gains in the future.

Downside

Although, the cryptocurrency has realised a spectacular performance so far, everything is not rosy in the digital currency world. With a surge in bitcoin traders, transaction fees are increasingly becoming sky-high and it takes now some days instead of minutes for transactions to come through. Moreover, there is a myriad of other cryptocurrencies over 200 including the two main competitors of bitcoin namely Ethereum and Kin that are wooing investors who have started flocking to them. Some provide specific investment in the marijuana business and other cryptocurrencies are under their way. All of these may cripple bitcoin’s success in the years ahead. Adding to this concern is the fact that Bitcoin is digital, decentralised, not highly regulated and its investors are anonymous, making the EU and some governments perplex about its use for terrorist financing, money laundering and other criminal activity purposes. It is also not immune to cyber attacks like any software especially with the recent ransomware attack that has affected numerous companies on a worldwide basis and demanding bitcoin as payment for unlocking the system. One of the long-standing critical issues is that Bitcoin is extremely volatile. For instance, its price recently slid by 27% in just a couple of days after attaining an all-time high of $ 3000 in June 2017. Its price volatility is not uncommon and could be attributed to news about security breaches, the announcement of a rise in the number of nations poised to use bitcoins and the tax treatment underlying that digital currency.

Bottom Line

Since its creation, Bitcoin has jumped over an array of hurdles from scepticism to rejection and at present time, it is becoming mainstream with its increasing recognition by government along with its use in business activities. Unequivocally, an individual who has invested in this asset in July 2011 at a price of around $31 at that time would have made today a blockbuster gain, albeit enduring a lot of stress because of extreme price volatility and rising transaction prices. Thus, it is crystal clear bitcoin is not for risk-adverse investors or the faint-hearted, involving tremendous risks with regular daily double-digit percentage variation in price. Hence, one should weigh up the risks and benefits associated with this investment in light of its objectives, risk tolerance and current situation to ascertain to which extent bitcoin could suits him and whether or not be incorporated in its portfolio.

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