This month I will be discussing the bitcoin and cryptocurrency phenomena that everyone wants to know more about.
I receive questions about this topic on a daily basis and I will try and explain the details around it in as easy way as possible.
Firstly I think it is important to give a brief description of what bitcoin (cryptocurrencies) are.
Bitcoin was created in 2009 by an anonymous person or group who goes by the alias Satoshi Nakamoto who created an algorithm/formula in an effort to decentralize currency away from the traditional government regulated currency we all know (banknotes & coins).
What this means is that there is no official government or treasury controlling the system and the value of Bitcoins are established by people and not governments and treasuries. Transactions are logged and verified over the internet by a public ledger called blockchain.
From the above it all seems pretty simple and attractive but there are various stumbling blocks and also a few things to consider before jumping in and investing thousands of Rands into Bitcoin.
- It is not regulated
The problem with this is that there is no one who will protect transactions, because of anonymity. This means that if someone hacks your computer or Bitcoin wallet, there is no one who can assist you in getting your money back.
- There is no inherent value
Unlike traditional money we all know, this currency is not backed by a government or treasury and this not linked to an underlying asset, thus it holds no inherent value, but is controlled by anonymous buyers/miners.
- Who holds majority shares?
A big concern is that no one knows who actually created Bitcoins and thus, who is holding the majority shares? If there is one person or group holding 51% of the Bitcoins, then that means that they can single handedly manipulate the price and push it upwards and sell everything once they are happy with the returns, thus creating a massive crash.The other question is, why is the creator of the currency trying to stay anonymous?
- Governmental crackdown might hurt the currency
China was the first to ban the cryptocurrencies and this led to a sharp fall in market price (almost 40% in one day) and it seems like a few other countries are exploring ways to reign in on the massive profits.
- Volatility remains very high
2013 saw a 71% crash within 12 hours which took 7 months to recover from.
November 2013 it went from $1150 to $500 within 3 weeks (57% drop). It took 4 years to reach $1000 again.
February 2014 it went from $867 to $439 (49% drop) within a few weeks.
June 2017 it went above $3000 and dropped to $1869 by beginning of July 2017.
September 2017 it reached $5000 and dropped to $3000 within 7 days.
A lot of investors say they want high risk, but are you willing to lose over 50% of your money overnight? I would be very cautious before investing my hard earned money into something with such a high risk factor.
I hope the above cleared up some questions regarding this new and interesting form of investing and that you have a clearer indication of what it is all about.