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What is Bitcoin?
Watch this short video that explains what Bitcoin is and why it is the most valuable cryptocurrency in the world. Learn how to use it, how to safeguard it and how to trade it.
Why You Might Want to Wait Before You Invest in Bitcoins
Holding Bitcoins is a bit like living in the Wild West. You never know what’s going to happen. If you’re interested in speculation, the purchase of Bitcoins may be a good idea. However, there are several reasons why holding Bitcoins can be a mistake. Bitcoins can lose value suddenly, suffer from a lack of governmental oversight, and offer no protection in the case of loss or theft.
If you’re thinking about investing in Bitcoins, ensure that purchasing Bitcoins is financially advantageous for your unique situation. You might be better off sticking to a government issued currency.
Bitcoins are disadvantageous for the average person:
- It may not be useful for your needs. While there are a growing number of merchants willing to deal with Bitcoins, there still aren’t very many. How useful is this form of currency from a practical standpoint? You can’t take it to your local big box store and load up on groceries.
- If you’re considering purchasing Bitcoins strictly for purchasing goods or services, think again. Other forms of currency are more widely accepted and convenient.
- There’s no advantage to using Bitcoins at most places, unless you require the anonymity that Bitcoins provide.
- Some financial experts believe the value of Bitcoin will ultimately crash. Right now, there’s little to no government regulation of Bitcoin, and that’s exactly why many users have adopted this form of currency.
- Many financial experts believe that governments will eventually get involved and impose some degree of regulation. When this happens, it is speculated that Bitcoin users will cash out and abandon the system. This will lead to the value of Bitcoins crashing.
- Even Warren Buffett has instructed investors to stay away from Bitcoin.
- It’s too volatile. Unless you’re interested in currency speculation, the volatility of Bitcoin could be considered a disadvantage. It’s possible to lose 50% or more of the value of your Bitcoin holdings very quickly.
- It’s more than a little stressful to hold a currency that might drop precipitously in value over hours or days. It’s clearly not the way to store your life savings unless you enjoy playing the financial version of Russian roulette.
- Bitcoin values are primarily based on supply and demand for the currency. Experts doubt these factors can be predicted accurately.
- Bitcoins lack oversight and guarantees. A complicated system exists to keep Bitcoin on the straight and narrow. However, it lacks a formal regulating body. Your bank account is safe from fire, robbery, and just about anything else you can imagine. However, if your Bitcoin wallet is lost or corrupted, you’re finished.
- Even if you can show that someone stole your Bitcoins, the police rarely get involved. The government has been unable to define Bitcoin, much less show an interest in chasing down Bitcoin thieves.
- Bitcoins can be difficult to maintain. Imagine carrying or storing a lot of cash. It’s worrisome and easy to lose. While Bitcoins don’t take up any space, they can be just as fragile and easy to lose. A home fire can wipe out all of your electronic devices and your bitcoin wallets.
- Bitcoins can be easier to keep safe than cash, but it’s much less safe than keeping money in your bank account.
Bitcoins have a few advantages if you’re interested in currency investing. For the average consumer, however, Bitcoins provide more disadvantages than advantages. If you’re considering the purchase of Bitcoins, make a list of the reasons why. Are those reasons worth the risks? Perhaps so. Only you can decide.
How the blockchain is changing money and business | Don Tapscott
The Advantages of Using Bitcoin
Bitcoin is a unique currency. It’s completely virtual. Bitcoin is unsupported by any central bank or other authority. It’s not the official currency of any country. Yet all of these are both advantages and disadvantages. Whether or not bitcoin is an advantage for you is dependent on your situation.
Bitcoins have several advantages over conventional currency:
- Bitcoins can’t be physically stolen. There is nothing physical to steal. In theory, however, someone could force you at gunpoint to send your bitcoins to someone else.
- It’s possible to avoid taxes. The onus is on the taxpayer to be honest about bitcoin transactions. There are many disagreements regarding the government’s ability to track bitcoins through the system. Most of the investigative activity regarding bitcoins is centered on major crimes, such as drug trafficking.
- Bitcoins are extremely flexible. You can pay anyone in the world at any time. Holidays, exchange rates, borders, and the time of day are irrelevant. Bitcoins have far greater flexibility than any other type of currency system.
- There are no transactional costs. As there is no central authority, transactional costs are unnecessary. All of the computers on the system, including your own, are doing the heavy lifting. There’s no one else to pay. You could send your child a million dollars’ worth of bitcoins without it costing a single penny. Try doing that with your local bank or PayPal.
- However, providing a small transactional fee will guarantee that payments are processed more quickly.
- Privacy is maintained. Your personal information isn’t required as part of the transaction. There’s no risk of identity theft. The entire process is encrypted. Keep in mind that it’s not entirely anonymous. All transactions are recorded and posted for anyone to view. However, your name isn’t publicly associated with your transactions.
- Transactions cannot be reversed. This is good news for merchants, but may be a disadvantage for consumers.
- The bitcoin code is open source. There are no secrets, other than the identities of the parties involved in the transactions.
It’s easy to see why bitcoins are useful in certain situations. You have a greater degree of privacy and a lack of transactional costs. Bitcoins can be used at any time and on any day. You can still make or accept a payment on Christmas day at 2:00 AM.
Disadvantages of Bitcoins
There’s a little bad news, too. Bitcoins have certain disadvantages. The lack of governmental regulation and the limited supply of bitcoins creates challenges. In addition, considering the total number of retail establishments, only a small percentage of them accept bitcoins.
Consider these disadvantages:
- The value of bitcoins is very volatile. The number of bitcoins is limited, and demand can vary from one day to the next. So the value of a bitcoin can change very quickly. It’s possible to earn or lose a tremendous amount of value very quickly.
- Bitcoins are not widely accepted at this time. While the number of merchants and individual users is increasing, bitcoins still are an uncommon form of currency. Bitcoins are becoming more mainstream all the time, though. The Federal Reserve Board reports that the number of bitcoin users is doubling every 8 months.
- It’s possible to lose your bitcoin wallet and all of your bitcoins. It’s crucial to keep a backup of your wallet file. A hard drive crash, virus, or corrupted file will cause your bitcoins to become permanently orphaned. You can never get them back. No one else can ever possess them, either.
- There’s a lack of buyer protection. If you pay for a product prior to receiving it, there’s no recourse if the product isn’t delivered. However, there are third-party escrow services that can protect buyers. If you’re paying in advance with bitcoin, you may want to use one of these services.
- Bitcoins make it easier to commit crimes, including fraud. The anonymity of bitcoin makes it attractive to those engaged in illegal activity. However, cash is still more widely used in illegal activities than bitcoins.
It’s important to consider how the disadvantages of bitcoins dovetail with your situation. It’s easy to lose all of your bitcoins if you’re careless. You can also lose a lot of money quickly if the demand for bitcoins drops sharply.
Liquidity of Bitcoins
The bitcoin system is capped at 21 million bitcoins. Currently, there are roughly 14,800,000 bitcoins in circulation. There is a lot of speculation about what will happen to the value when the 21 million-bitcoin limit is reached.
In general, the US stock market is very liquid. You can quickly sell most stocks, bonds, or mutual fund shares at the going rate without concern. There’s always someone willing to buy from you or sell to you, provided the price is right.
Given the limited number of bitcoins and users, it’s not as easy to sell your bitcoins if you wish to cash out. Even if you can find a buyer, even relatively modest transactions can create volatility in the price for a bitcoin.
How Bitcoins are Created
Bitcoins are created through a process called “mining.” The first computer to solve a puzzle receives a certain number of bitcoins. Unfortunately, there are many other computers competing against yours. And you probably don’t have a computer that can compete.
Mining bitcoins is extremely challenging. There are companies with powerful computer networks designed to solve the puzzles. The typical home user has no chance of winning.
When a puzzle is solved, bitcoins are created and awarded to the owner of the winning computer. The number of bitcoins provided decreases as the number of bitcoins in circulation gets closer to the 21 million-bitcoin limit.
With an adequate computer, the puzzles take approximately 10 minutes to solve. The winning solution requires quadrillions of operations per second. The difficulty of the puzzles can increase or decrease to match the current environment. Winning computers now utilize dedicated circuits rather than software to solve the puzzles.
Most of those competing spend more on electricity than they win in bitcoins!
Bitcoins as an Investment
Investing in bitcoins is becoming more popular. Many millionaires have been created through the buying, holding, and selling of this currency. It’s also possible to lose a lot of money. Bitcoin is becoming more mainstream every year, and even Wall Street is taking an interest.
There are two primary ways to invest in bitcoin at this time:
- The Bitcoin Investment Trust. If you want to invest in bitcoins but leave the decisions to the experts, this is one option. Other similar investment options are popping up. You don’t have to worry about maintaining a bitcoin wallet or make decisions about when to buy or sell.
- Invest directly in bitcoins. This is very similar to investing in any other currency. The low volume of bitcoins ensures significant volatility. From mid-September 2015 to early November 2015, bitcoin prices nearly doubled!
- If you have a strong stomach, it’s possible to make a lot of money with bitcoins. However, it’s questionable whether there is any way to make accurate predictions about the value of bitcoins. There are many websites claiming the ability to predict bitcoin prices. None, however, has a proven record of accomplishment.
- Many experts consider investing in bitcoins to be similar to gambling.
Currency investing is always exciting and rarely predictable. Bitcoin investing is even more so. It’s definitely not the place to put your entire nest egg. However, if you’re bold and stay informed, bitcoin is one way to invest with high risk.
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