June 13, 2017    4 minute read

Bitcoin 101: Investing in Cryptocurrencies

Riches Amid Volatility    June 13, 2017    4 minute read

Bitcoin 101: Investing in Cryptocurrencies

Bitcoin is a digital currency (a.k.a. cryptocurrencies) created in 2009. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms as it’s operated by a decentralised authority. There are no physical bitcoins, only balances are kept on a public ledger in the cloud. Bitcoins are not issued or backed by any banks or governments.

Bitcoin uses peer-to-peer technology to facilitate instant payment. The individuals and companies who own the computing power and participate in the Bitcoin network are known as “miners,”. They are motivated by rewards in terms of release of new bitcoins and transaction fees are paid in bitcoin. These miners can be thought of as the decentralised authority enforcing the credibility of the Bitcoin network. Bitcoin mining is the process through which bitcoins are released to come into circulation. Basically, it involves solving a computationally difficult puzzle to discover a new block, which is added to the blockchain, and receiving a reward in the form of few bitcoins. As more and more bitcoins are created, the difficulty of the mining process – that is, the amount of computing power involved – increases.  (Source: Investopedia)

Investing in Bitcoins

There are many Bitcoin supporters who believe that digital currency is the future. Those who endorse it are of the view that it facilitates a much faster, no-fee payment system for transactions across the globe. Although it is not backed by any government or central bank, Bitcoin can be exchanged for traditional currencies; in fact, its exchange rate against the dollar attracts potential investors and traders interested in currency plays. Indeed, one of the primary reasons for the growth of digital currencies like Bitcoin is that they can act as an alternative to national physical currency and traditional commodities like gold. Bitcoins can be earned through the following methods:

Receiving as Payment: Bitcoins can be accepted as a means of payment for products sold or services provided. An online business can easily accept bitcoins by just adding this payment option to the others it offers, like credit cards, PayPal, etc. Online payments will require a Bitcoin merchant tool (an external processor like Coin base or BitPay).

Interest Payments: Another interesting way (literally) to earn bitcoins is by lending them out, and being repaid in the currency.

Betting: It’s possible to play at casinos that cater to Bitcoin aficionados, with options like online lotteries, jackpots, spread betting and other games. Of course, the pros and cons and risks that apply to any sort of gambling and betting endeavours are in force here too.

Risks of Bitcoins

The concept of a virtual currency is still new and, compared to traditional investments, Bitcoin doesn’t have much of a long-term track record or history of credibility to back it.

Regulatory Risk: The currency isn’t subject to government regulation or control, resulting in widespread in black market transactions, money laundering, illegal activities or tax evasion. This lack of regulatory support limits investors protection and ablility to recover.

Security Risk: Bitcoin exchanges are entirely digital. These digital systems are at risk from hackers, malware and operational glitches. Hackers can also target Bitcoin exchanges, gaining access to thousands of accounts and digital wallets where bitcoins are stored. All Bitcoin transactions are permanent and irreversible. It’s like dealing with cash: any transaction carried out with bitcoins can only be reversed if the person who has received them refunds them. There is no third party or a payment processor, as in the case of a debit or credit card – hence, no source of protection or appeal if there is a problem.

Insurance Risk: There exists no insurance against bitcoins as the same is not a recognised currency.

Market Risk: Bitcoin values can fluctuate as any other investments. According to the CFPB, the price of bitcoins fell by 61% in a single day in 2013, while the one-day price drop in 2014 has been as big as 80%. If fewer people begin to accept Bitcoin as a currency, these digital units may lose value and could become worthless.

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