2017 was a tremendous year ever for Bitcoin and the cryptocurrency and digital asset world at large. The alpha dog cryptocurrency leading the entire cryptoasset industry had a spectacular run from around $1000 per BTC at the start of 2017 to almost $20,000 per BTC at the end of 2017 - all this despite trial and tribulations throughout the year including a Chinese ban on cryptocurrency and digital currency mining and a denial by the Securities and Exchange Commision (SEC) of a Bitcoin exchange-traded fund (ETF).
There was another trial/tribulation for Bitcoin in 2017, however. Despite its unprecedented surge, Bitcoin was (and still is) plagued with key problems that hinder its usability in a truly widespread manner as originally intended for this cryptocurrency - these problems might affect Bitcoin's future as an alternative currency to fiat currency and the current traditional banking and financial system.
In August 2017, acting out of growing fear that Bitcoin would one day become too archaic and lose relevance in the cryptocurrency and digital currency industry, a group of Bitcoin developers split from the original cryptocurrency and created Bitcoin Cash in a process/procedure known as a fork.
First, what is a fork?
A fork in the cryptocurrency world can be simply explained as the splitting of any cryptocurrency into two or more independent branches but which all share the same roots. A fork is said to happen when the core developers of any particular cryptocurrency or digital asset disagree on the future operations of the blockchain underlying that digital asset and, as such, decide to go separate ways.
When a fork happens, the newer cryptoasset does not start from scratch from block zero or a genesis block but continues on from the point in the original blockchain when the split occurred. This means that all transactions and amounts of cryptocurrencies held by users on the old cryptoasset remain valid, but any future transactions are conducted independently of the original or parent cryptocurrency.
Bitcoin vs. Bitcoin Cash
The main point of contention that led to the split in the core Bitcoin development community was the slow transaction processing speed that Bitcoin was dealing with. This, coupled with very high transaction fees that were born out of the very low number of transactions the Bitcoin blockchain could support at any given period of time, made some in the core bitcoin development community desire a change.
Bitcoin’s block size is pegged at just 1MB but was designed to be increased at a later date by the creator of the cryptocurrency, Satoshi Nakamoto, who (if this is, in fact, a single individual) was never heard from after 2010, but the upgrade was never carried out by the developers who have since taken over control. With the huge adoption of Bitcoin, whose blockchain could only carry out about 250,000 transactions every 24 hours, a lot of backlogs began piling up which meant that miners received larger and larger fees for mining (eg. validating transaction on the Bitcoin blockchain). This is the problem that Bitcoin Cash attempts to solve - with an increased block size of 8MB, transactions can be verified at a very much faster rate on-chain, which then translates into cheaper transaction fees.
The Future of Bitcoin Cash
Bitcoin Cash markets itself as the true image of what the Bitcoin founder Satoshi Nakamoto had in mind - it's not attempting to be some sort of alternative version of Bitcoin, but attempt to be regarded as the true Bitcoin itself. The core Bitcoin development team obviously disagree with this contention. from which the core Bitcoin has deviated. With time, the Bitcoin Cash development team hopes that this new cryptocurrency will become the number one cryptocurrency in the industry and be regarded as the one true Bitcoin.
Jamie Dimon Steps Back from Harsh Crypto Comments - Another Indication that the Traditional Financial World's Hatred of Cryptoassets is Slowly Beginning to Thaw
.Jamie Dimon, CEO of JP Morgan Chase, stepped down from his comments he made in late 2017. In September of 2017, Dimon said that Bitcoin is a "fraud" and that he would fire people who worked for him if they traded in the cryptocurrency.
bitcoin is a fraud
Many in the cryptoasset and cryptocurrency community were unhappy about such remarks coming form a very senior person in the financial and banking world. Many in the financial world, including Goldman Sachs CEO Lloyd Blankfein, hesitated even during that time in 2017 to make extremely harsh criticism of Bitcoin and cryptocurrency. They didn't make extremely harsh criticisms, but they still criticized it.
Blankfein said in November of 2017 that "maybe Bitcoin is kind of a bubble" but he also said that "the list of things that are conventional today that I use every day that I thought would never make it is a very long list."
the list of things that are conventional today that I use every day that I thought would never make it is a very long list
On Tuesday, January 9, however, Jamie Dimon said that he regretted calling Bitcoin a fraud - he added that he feels the "blockchain is real." These statements were likely prompted by various things, including the rise in cryptocurrency and cryptoasset prices since Dimon made that original statement. However, it's likely that pressure on Wall St. to not be the pariah of the crypto world also had something to do with it. Finally, it's possible that Dimon simply took some time to learn more about cryptocurrency and cryptoassets - after that learning he might have a better opinion of the overall technology behind it.
the blockchain is real
While many want to look down upon Dimon for going back on his remarks or for not being on the mark back in 2017, this isn't a smart way to think about things. Incentives matter a lot - this is basic economics. Jamie Dimon is the CEO of one of the world's largest financial institutions - he is the epitome of the entrenched establishment in the global financial world. No one who is not naive should be surprised that such a person would make negative comments about something that could potentially disrupt his entire industry - an industry he devoted his life to. Instead, it's promising that he took a step toward setting things right.
Bitcoin is a decentralized digital currency which is built on the revolutionary blockchain technology, the purpose of which is to provide people and organizations all over the world with an alternative peer-to-peer means of making payments that is fast, private, and doesn't require the modern financial system/infrastructure. Bitcoin allows for the potential eschewing of fiat money to perform financial transactions in favor of an immutable record (eg. blockchain) that is deeply decentralized and highly secure.
Bitcoin (BTC) came on the scene in January of 2009 - during the heart of the global financial crisis of the time. In a white paper published by Satoshi Nakamoto, Bitcoin's purpose and technical framework were articulated - although the purpose has evolved and continues to do so, Bitcoin has remained the most trusted and most popular digital currency to date.
General Characteristics of Bitcoin
Bitcoin when it first came online was an innovation the like of which has never been seen. Bitcoin has many distinct characteristics and features some of which include:
How are Bitcoin acquired?
Bitcoin can be created through a complicated and capital-intensive (the capital being computing power) process known as mining - miners receive a reward (akin to a fee) for providing the computer power needed to validate Bitcoin transactions. Alternatively, an individual can simply buy Bitcoin from a cryptocurrency exchange that is reputable using their fiat currency.
Bitcoin and Banking
Bitcoin can be created through a complicated and capital-intensive (the capital being computing power) process known as mining. Alternatively, an individual can simply buy Bitcoin from a cryptocurrency exchange that is reputable using their fiat currency.
Bitcoin is not accepted by any commercial bank for safekeeping as of this writing - banks traditionally only deal in the fiat currency realm with banks in each country primarily transaction and storing the fiat currency of that particular country under regulation from central banks and other governmental regulatory bodies. However storing Bitcoin is easy and convenient without a banking system because they can either be stored on exchanges (eg. Coinbase, Kraken, Poloniex, Xapo, etc.) or on a private Bitcoin wallet - each method has its own advantage and disadvantages, but both are generally convenient and reliable if done properly.
The world is abuzz with talk of Bitcoin and other cryptocurrencies and cryptoassets. Not long ago these revolutionary means of transacting were considered a fringe idea that was going to die a natural death or evolve into some niche part of a more broad product schema. Fast-forward to the present day, however, and you'll see that the cryptocurrency and cryptoasset industry has snowballed and has a market cap (the total value in USD of all material cryptocurrencies and crypto assets) that rivals the largest firms in the US (with little sign of things slowing down).
So, what is this new thing called cryptocurrency and what is all the commotion in the financial news related to it about?
What is a cryptocurrency or a cryptoasset?
A cryptocurrency or cryptoasset (these terms can generally be used interchangeably) in general terms can be defined as any member of the new blockchain-based platforms that are made specifically to enable people to make peer-to-peer payments in fast, highly secure, and private ways that requires no recourse to banks, payment providers, or third-party clearing firms. A cryptocurrency is generally a stateless borderless digital currency, the first example of which came into existence in 2009 with the creation of Bitcoin by Satoshi Nakamoto. The cryptoasset industry has since grown exponentially and presently has over 1000 distinct currencies - many of these are scams and useless gimmicks while others are potentially very useful and add capabilities beyond what Bitcoin originally possessed.
Cryptocurrency vs. Fiat Money
The following are a few key aspects of cryptocurrencies and cryptoassets that distinguish them from traditional fiat money (eg. USD, Euro, Yen, Yuan, etc.):
How do I store cryptocurrency?
Being a totally decentralized and boundary-less currency, cryptocurrencies don’t need the present banking infrastructure to be kept safe by their owner. They are stored in encrypted software known as “wallets”, which carry unique codified address with which the user sends and receives them. Additionally, cryptocurrencies and cryptoassets can be stored with third parties where the third party stores the key cryptographic information (eg. your private keys) that will allow access to your cryptocurrency or crypto assets.
Such third party services include Kraken, Poloniex, Coinbase, and Xapo. There is an inherent risk present when using third-party firms for cryptocurrency and crypto asset storage - you are trusting them with the proper maintenance of very key and unique information.
How can I acquire cryptocurrency?
There are two main ways in which to acquire cryptocurrencies or cryptoassets. The first is by following the technical process of creating them (which is generally known as mining), where computers are coupled with specialized hardware to solve massive mathematical puzzles with the chance earning a reward which is the cryptocurrency. The second method is by simply going the route of using your fiat money to buy the cryptocurrency of your choice from the nearest reputable exchange you can find (eg. those third-party firms referenced above).
Prices of cryptocurrencies and cryptoassets from one cryptoasset to another as each digital currency has its own distinct features and peculiar purpose it serves - these unique features and/or purposes influence demand and the addressable market, which in turn influences price. Currently, cryptocurrencies and cryptoassets have proven to be very volatile when compared to traditional financial instruments such as stocks, bonds, real estate, and commodities - this volatility makes it riskier when purchasing cryptocurrencies and cryptoassets because it is hard to know whether the price of a cryptoasset will move against you soon after purchase.
A cryptocurrency is a secured decentralized digital medium of exchange developed to facilitate secured peer to peer transactions. While many people have heard of cryptocurrencies and some are involved in the purchase and sale of cryptocurrencies and cryptoassets, only a few are aware of the history behind this potentially world-changing application of cryptographic technology.
As such, compiled below is the history of cryptocurrency. This history will be both useful for newcomers to the cryptocurrency and cryptoasset worlds as well as those that are more seasoned - understanding the history of a topic or technology almost always is useful in terms of adding context and grounding to one's understanding.
The late 1980s to Early 1990s - Foundations begin to Form
In the 1980s people began conceiving the idea of the creation of digital cash and/or virtual currency. These people then began to seek ways to bring this idea to fruition. However, none of their efforts and/or the results was reported.
In the year 1990, American cryptographer David Chaum invented DigiCash, the first form of electronic currency. This new "e-cash" gained tremendous publicity and sparked interests in various diverse intellectual quarters, including libertarians, anarcho-capitalists, and those interested in the applications of cryptography. Chaum's DigiCash was however later found to have some faults and subsequently, was no longer used.
1998 - A Precursor to Bitcoin
In 1998, Wei Dai, a computer engineer created and published an article on "b-money". Dai regarded b-money as an anonymously distributed electronic cash system which allows for senders to directly communicate with buyers over “an untraceable network”.
Also in 1998, computer scientist Nick Szabo, designed the mechanism for a decentralized electronic currency he termed "bit gold". To use bit gold, a person would have to solve cryptographic puzzles whose solutions would be sent to a registry and then assigned to a designated public key representing the solution provider. Each solution would then become a part of a subsequent challenge which would then help to create a growing chain of new property for the solution provider. This design was created to help validate new coins.
Although bit gold was never implemented, it is regarded as the precursor to Bitcoin - those who know anything about Bitcoin mining will see the somewhat shared intellectual DNA between Bitcoin and Szabo's bit gold.
2009 - The First Truly Decentralized Digital Currency, Bitcoin
The year 2009 can be said to be the year the concept of cryptocurrency became established. Although much work (both technical and non-technical in nature) had been done in the previous two decades pertaining to digital currency and the potential application of cryptographic methods to make them effective, 2009 can easily be considered the genesis of cryptocurrency proper.
In 2009, Bitcoin was established. This establishment and its subsequent use can be attributed to Satoshi Nakamoto, who is a pseudonymous individual (or more likely, a group) that developed Bitcoin. Nakamoto articulated the concept of Bitcoin in a white paper published in the same year. Per his white paper, Nakamoto called Bitcoin a peer-to-peer cash payment system - little did the initial readers of the white paper (and possibly Nakamoto himself/herself) know what Bitcoin would become over the course of the coming decade.
This system was able to actualize true decentralization which was a feature many before him/her could not achieve. He was able to achieve this such that there could be a consensus between parties without the need for a central authority (eg. a financial firm or a government). Additionally, Nakamoto's Bitcoin was able to seemingly solve the double spending problem, something that seemed unachievable without a proper centralized network or clearinghouse.
Bitcoin has since gone beyond being the first cryptocurrency to also be the most popular, most sought after, and most used cryptocurrency with over 16 million in circulation (out of a total of 21 million that will ever exist per Nakamoto's original design).
2009 to Present - Altcoins, Proliferation, and Investing
Since the creation of Bitcoin in 2009, over 850 cryptocurrencies (often referted to as altcoins) have been developed and are now in circulation. Some of these altcoins are Litecoin, Peercoin, Robocoin, Ethereum, Salt, Cardano, Iota, Viacoin, Siacoin, Bitcoin Cash, Ripple, and Dogecoin.
Many of the new cryptoassets or altcoins that are on the market today are not considered high-quality cryptoassets like Bitcoin but are instead considered frauds, scams, gimmicks, or schemes that allow the creators of the coins to make a quick profit (through the use of what are called initial coin offerings or ICOs).
Other cryptoassets or altcoins, however, seem useful and add capabilities beyond what Bitcoin is currently capable of. For example, Bitcoin is generally only used for payments while Ethereum has the capability for use in what are called "smart contracts" and Iota is created to assist with the creation of an internet of things (IOT) world.
The concept behind cryptocurrencies is now being researched by financial institutions and governments, its’ monetary value is on a steadily rising (in terms of fiat currency such as the USD or the Euro) and many are beginning to see cryptocurrency as an investment option.
Foggy Future - Where will cryptoassets go from here?
Given the past 30 years in cryptocurrencies, cryptography, and the concept of decentralized digital cash (and especially the last 10 years since the creation of Bitcoin), it's a fool's errand to try to predict in any meaningful way where things will go in the cryptoasset space. However, it is likely that many of the early trends seen today will continue on. Specifically, it is likely that cryptoassets will consume more mindshare globally, will break into Wall Street (eg. futures, ETFs, hedge funds, etc.), and that a broader infrastructure (both in support of and in use of crypto assets) will be built up over the coming years and decades.
I wrote about Bitcoin previously. You can see my original article here. I have learned more about Bitcoin, more about investing, and I have been able to look at Bitcoin through a different lens since writing that article.
The main part of my increased knowledge about Bitcoin has come from one of my favorite, if not my absolute favorite, podcasts called EconTalk. On an episode of EconTalk, host Russ Roberts interviewed Bitcoin evangelist and Xapo CEO Wences Casares. The interview was both interesting and informative. You can access the interview as well as a good amount of extra learning material here. I highly recommend that you listen to the interview and read some of the material on the website if you are interested in Bitcoin or are planning to make a purchase.
In the interview, Casares discusses many things but what I want to focus on here is Casares's postulation that purchasing Bitcoin is a very low-risk/high-reward endeavor. Casares believes that there is a non-trivial chance that Bitcoin will grow in popularaity and become a global currency. Even if 1% of global trnsactions are done in Bitcoin, Casares argues rightly that Bitcoin's value will grow immensely in value. This is easy to understand. If 1% of global transactions will be done in Bitcoin at some point in the future, the total value of all Bitcoin in existence wold equal (0.01)(x), x being equal to the total value of all of the transactions done in that future year. If we include black market transactions, the value of Bitcoin will be even higher. It is important to remember that an inherent property of Bitcoin that separates is from every other national currency in existence is that Bitcoin are generated at a predictable pace and after a certain year, no more Bitcoins will ever come into existence. Therefore, Bitcoin cannot be deflated like the US Dollar, the Euro, the Yen, or any other national currency can. We can see that as the value of global transactions rises, the total value of all Bitcion in existence should rise (assuming Bitcoins comprise a stable percentage of all global transactions). So, if Casares is correct in saying there's an non-trivial chance of Bitcoin taking off and becoming a means of exchange for a significant (even 1% is significant) portion of global transactions, the value of each individual Bitcoin will rise tremendously. Casares believes that in the next few decades a single Bitcoin could be worth $1 million USD. That definitely sounds crazy in 2015, but it isn't at all crazy if Bitcoin takes off.
Of course Bitcoin has a very high probability of not taking off. Casares acknowledges this, but this acknowledgement doesn't stop him from recommending that individuals should purchase a few Bitcoin. He argues that purchasing a few Bitcoin will cost less than $1000 as of the writing of this post (this will obviously change as Bitcoin fluctuates on a daily basis). A person who takes Casares's advice now has two possibilities for his or her future as depicted by the tree below.
The above options are different than investing in stocks, real estate, or commodities. Investing in those things requires a large up-front investment and historical growth rates for those investments are nothing spectacular. With Bitcoin, a very small investment is more than sufficient to position you to take advantage of a potential meteoric rise in the value of Bitcoin. If Bitcoin takes off, it will be much more valuable than it is today. It could potentially make you a millionaire off a $1000 investment in a decade or two. Thinking about it this way reminded me of great investor and author Monesh Pabrai and his book The Dhando Investor. In it Pabrai describes the concept of Dhando, a concept that echos Warren Buffet's investing style. The concept of Dhando mean taking calculated risks that have extremely limited downside potential while having extremely amazing upside potential. By using the concept of Dhando with skill an investor can take risks that are of a very particular variety, the kind where making a mistake doesn't mean disaster. To be Dhando is to be like Pabrai or Warren Buffet. To be Dhando is to take those risks that have very little downside but very big upside potential.
Casares's recommendation had Dhando qualities. It is a recommendation that is geared toward a Bitcoin investor entering into a position where his or her downside is limited but where the upside is great. Although the chances of winning here are slim, it is Dhando because it preserves your wealth and positions you into a place to profit should things go well.
This is now how I view investing or purchasing Bitcoin. I don't know much about Bitcoin mining and I almost have no use for Bitcoin for use in making transactions at this stage. I view Bitcoin as a Dhando endeavor where I can place my bet and think of it no more. In a decade or two I'll either be rich or I'll be indifferent about it. It takes a small amount of time and about $1000 for me (for you it might be a different amount - BUT it should always be an amount that allows you to remain Dhando - meaning an amount that you will be pretty much indifferent about losing should Bitcoin fail totally).
P.S. Check out my first foray into purchasing Bitcoin using Coinbase here.
eFor my first foray into purchasing Bitcoin I decided to go with Coinbase. Coinbase is a Bitcoin wallet that also provides Bitcoin trading services and APIs for developers related to Bitcoin.
I chose Coinbase for primarily one reason - because it seems to be the most reliable based on the firms that back it. The two firms that caught my eye were the venture capital firm Andreessen Horowitz and the seed accelerator Y Combinator. These two firms are well-known and well-respected in Silicon Valley, having had top Silicon Valley tech firms pass through their doors (Facebook, Box, Airbnb, etc). I’ve heard about these firms before I heard about Bitcoin and when I knew that they were involved with Coinbase, I automatically put Coinbase above the many other Bitcoin and cryptocurrency wallets that exist. There are competitors which I find very interesting of course (notably Xapo - I will very likely try it out later), but Coinbase seems to be the most secure. I obviously am using a heuristic in deciding what Bitcoin wallet is most secure – unable to see what is happening behind the scenes and unable to fully understand all of the complex technology behind cryptocurrency, I must use some proxy or some heuristic in order to make my decision, and here I use perceived reputation or perceived reliability based on affiliation with other strong organizations.
Coinbase is not the cheapest Bitcoin wallet. Coinbase charges 1% to purchase Bitcoin but it is free to receive Bitcoin as long as you don’t convert into USD. I am aware that 1% isn’t cheap compared to other ways to purchase the cryptocurrency, but when it comes to such a new technology, security and reliability is primary for me. For that 1%, however, you get a trusted firm through which you can purchase your Bitcoin. The more tech-savvy individuals among you might choose a more do-it-yourself option, but I don’t have either the time nor the inclination ( (nor risk-tolerance) to choose that route. Those who do might be more well-served by doing it themselves, where they can save money on the fee, but more importantly have a chance at learning some interesting things about Bitcoin that one cannot learn by simply using a very user-friendly Bitcoin wallet such as Coinbase.
I have been impressed with the front-end security of Coinbase. To sign up you are required to upload a photo ID. This is antithetical to many of the reasons why people have been drawn to cryptocurrency and Bitcoin (privacy in making purchases online), but I am not so much concerned with privacy as I am with security and reliability. I primarily purchase Bitcoin as a form of speculations, not as a means of transacting. Therefore, the photo ID requirement didn’t deter me at all. Additionally, logging in to Coinbase requires two-factor authentication and it requires a third factor (email verification) when logging in from a new device or a new computer. This is impressive. I have only use the iOS app and it has a passcode and is compatible with Touch ID. I didn’t like that the passcode can only be 4 digits. Most banks have eliminated 4-digit passcodes for their lack of security (10 x 10 x 10 x 10 – 10 thousand possible combinations make it relatively easy to hack into). Since the app is always logged into your account (meaning your entire Coinbase account lies behind that 4-digit pin) and given the prevalence of Touch ID, I think a more secure passcode option might be a better idea (6-digits +).
Overall, I think Coinbase is an elegant, secure, and easy-to-use way to purchase Bitcoin for the average user. It might not please those that are very tech-savy and willing to take on a more hands-on approach with purchasing and securely storing Bitcoin.
Note: I have not yet used the Coinbase Vault. I have only use the Coinbase Wallet. When I do use the Vault, a more secure and long-term Bitcoin storage method, I'll update this article.
If you're here then you probably already know something about the digital currency called Bitcoin which has grown in popularity over the last few years. Therefore, we won't discuss what they are, how they are obtained, or how they are mined. We will be attempting to answer a simple question: Should you invest in Bitcoin?
More precisely, the question should be: Should you PURCHASE Bitcoin? This is because Bitcoins can be either purchased or obtained through mining. I won't be discussing Bitcoin mining here because I have only done minimal research on the topic and your success depends greatly on how you approach the endeavor.
So, should you buy some Bitcoin? Should you spend your US Dollars (or whatever form of currency you use) to purchase this new and unregulated digital currency? In my opinion, the current answer has to be a weak no. Let's go over the main reasons why this is so and then we'll go over why you might want to purchase Bitcoin.
Currency is Generally Not a Good Investment for Most Investors
For the vast majority of investors, investing in currency or currency trading is a fool's game. There is a lot of risk and uncertainty and there are always people who are playing the same game but are more informed than you. What makes you think that you will be better able to predict the movements of the Yen or the Euro than another currency trader with more education, a faster computer, and better software? That's what you have to do to succeed in currency trading because the only way you make money in currency trading is when you make the right "bet." Bitcoin is just another type of currency. It's not government-issued or government-regulated, but it is a currency nonetheless. The same principle of currency investing that applies to the plethora of government-issued and government-backed currencies apply to this new digital currency called Bitcoin.
I did say you were making a "bet" when currency trading. You might say, "don't you make a bet on any investment, be it a stock, a bond, real estate, etc.?" The answer to that question is a resounding yes. However, when you purchase some investments, it's a different type of bet you're making.
As we discussed in our article on investing in precious metals, if your gold coin goes up in value it only goes up because of the forces of supply and demand. If my share of Tesla Motors goes up in value, it may be for the same reasons of supply and demand, but it also might be because the underlying value of the company increased. That's an important difference.
It's the same thing with currency. If the value of the Euro goes up, it's only because of the forces of supply and demand. Maybe more people want to hold Euros (eg. interest rates in the Eurozone increase) or the supply of Euros decreases (eg. The ECB decides to print fewer Euros). There can be many other events and factors that affect the supply of and demand for Euros. Either way, there is no underlying value to Euros besides the paper they are printed on. They are worth what we say they are worth. This is profoundly different than the underlying value of a company like General Electric, which makes all kinds of things that people want to buy. If you own a share of General Electric, you own a share of all of its business and you own a share of an income-generating organization.
Getting back to the main point of this subsection, currency trading is just like making a bet on what the future value of a currency will be. If you buy Bitcoins with US Dollars you hope that sometime in the future the Bitcoins will be worth more than they are today. You hope that your Bitcoins will be able to buy more dollars than a number of dollars you used to buy the Bitcoins.
Note: We're ignoring inflation above for simplicity purposes
Bitcoin Don't Generate Income
This was briefly addressed above. Bitcoins are just a "thing." You hope that "thing" will be will be worth more in the future. That's the nature of your Bitcoin investment.
I would contrast this with the nature of many other types of investments. If you purchase stocks, you are hoping that the underlying value of the company (based many factors) improves. If you purchase bonds, you are effectively making a loan to a government or a company and you are hoping that you are repaid an amount greater than your original investment adjusted for inflation. If you purchase real estate, you are hoping that the price of your real estate goes up. That real estate price is dependent on supply and demand for real estate in the community, but it's also dependent on the rental income your real estate can generate and the improvements you make to the property. In the above three examples, the investments are tied to some kind of cash flow: corporate profits or dividends, interest payments, or rent payments.
With investments in currency, there is no income and there is no cash flow. You will sit with that currency until you are ready to sell.That's why investors who aren't overly cocky about their abilities and who have a medium-term or long-term approach prefer to invest in equities, bonds, and real estate rather than currency. Bitcoins are just another type of currency and they have all of the same drawbacks when it comes to investing that any traditional government-issued or government-backed currency would have.
Bitcoin Will Add Major Uncertainty (Volatility) to a Portfolio
I believe the final reason why you should be very cautious in deciding whether to purchase Bitcoin is that there is a lot of uncertainty and most Bitcoin purchasers seem to have less information about what they are purchasing than a traditional investor in equities would have.
Before you purchase a stock you research the company. You look at their financials and their management. If you are a smart investor you look at the actual company itself. You might walk into a store, look at their product, and really think about what this company makes. You then make a decision based on this information about whether investing is a worthwhile risk.
With Bitcoin, you are investing in a digital currency. There's not store to walk into. You know that the supply is increasing (for now) and that the difficulty of creating new Bitcoin (mining) is correlated with the number of people attempting to create them (attempting to mine for them). You know that you need relatively powerful computers to mine Bitcoin. You hear the news stories about people making money by purchasing or mining Bitcoin. But, how much do people really know? To me, it seems like many people are engaging in classic speculation.
There's no way to know whether Bitcoin will collapse tomorrow or whether it will increase in value by ten thousand times. There's even no way to know if people will accept it in the stores you shop at. There's no way to know what the government will say about Bitcoin. There's no way to know if a competing digital currency that is better in every way will come out tomorrow and Bitcoin will become completely worthless.
Given the above, you still might want to consider adding some Bitcoin to your portfolio
Although I don't believe it's a good investment today, Bitcoin might become something you might want to purchase in the future, even if just for using it as a means of exchange. Bitcoin might or might not last, but it's likely that some kind of virtual currency (be it Bitcoin or another virtual currency that does or doesn't exist yet) will become widely used. Throughout history, currencies change and there's no guarantee that the US Dollar (or any other currency that's widely used) will remain popular. It might just be the case that virtual currency will be attractive and used as a possible means of exchange. It might just be that virtual currency will be like money in the future.
Therefore, we can't completely say that you should never hold Bitcoin or virtual currency. However, if we do hold it, we should hold it because it is a useful and efficient means of exchange, not because we are deluded enough to think that holding currency in general or virtual currency specifically is a wise investment compared to the plethora of other investment options available to investors novice or expert.
UPDATE: Click here for an a new article written in light of new information and study
And now, given the rise of cyrptocurrencies and crypto assets to quasi-mainstream financial assets, we're dedicated to providing quality, relevant, and interesting material on cryptocurrencies and cryptoassets. Articles on Bitcoin, Ethereum, Ripple, Cardano, and many more cryptocurrencies and cryptoassets can be found on Pennies and Pounds - all that in addition to a plethora of information on what cryptoassets are, how the entire crypto industry came to be, blockchain/immutable ledge technology, mining, proof of work, proof of stake, and how to prudently invest in crypto if you are so inclined (based on your risk tolerance and ability to withstand the volatility that will come with a crypto portfolio).