Like the splitting of the atom – but perhaps not as significant to the whole of mankind, the bitcoin split into two on August 1. We now have bitcoin cash.
For the less knowledgeable investor, the bitcoin is a digital currency which was launched in the wake of the financial crisis in 2009, borne out of a general mistrust of the existing financial institutions.
Unlike a traditional currency, the bitcoin has no central monetary authority. Instead it has a peer-to-peer network made up of users’ computers. Without requiring physical presence, bitcoins do not have material form (except in a few cases where companies have fabricated ‘physical’ bitcoins.)
Instead, bitcoins work as a ‘public ledger’ with a constantly updated account of every transaction ever made replacing currency. This is known as the block chain.
Rise of the bitcoin
In June of this year, the digital currency hit an all-time high of over $3,000 (for one bitcoin) taking its overall market capitalisation to $114 billion. The bitcoin is also now worth more than an ounce of gold. As of August 4, gold is priced at $1269.42 an oz.
Saxo Bank had already predicted bitcoin will cross $2,000 during 2017. Now while that has already come true, Kay Van-Petersen, the analyst who made the prediction, believes that its price has the potential to cross $100,000 in 10 years.
The emergence of bitcoin has given rise to a number of online coins, commonly referred to as ‘cryptocurrencies’, where encryption is used to regulate the number of units of currency that can be created and to verify transactions.
There are now over 800 cryptocurrencies out there, with the combined market capitalisation at $100 billion. However, the majority of this is made up by just a handful of high profile Altcoins, like bitcoin (which makes up 40.1% of the market cap) and Ethereum (28.3% of the cap).
The reliance on cryptographic proof rather than trust, allows two parties to send bitcoins directly between each other without third-party intervention.
How can you buy bitcoin?
The cryptocurrency can be bought on a bitcoin exchange online or can be created by a network of computers with advanced hashing power that ‘mine’ the coins by solving equations.
An individual has a bitcoin wallet that contains unique code rather than a username, allowing them to send and receive bitcoins to and from other users.
If you do not want to buy a bitcoin for a couple of thousand pounds then you best option is to buy a CFD or other derivatives products.
Why buy bitcoin?
Since 2013, the bitcoin has been propelled into the mainstream due to high-profile internet entrepreneurs the Winklevoss twins, who tried unsuccessfully to register a bitcoin-based exchange-traded fund (ETF) called Winklevoss Bitcoin Trust.
The popularity of the bitcoin has also increased with global investors strangely due to its volatility.
Its enduring volatility during its early years is due to scarcity of supply; a certain number of bitcoins are released into circulation every ten minutes and there is a cap at 21 million which will only be reached in 2140.
Some might argue that volatility is not good for an investor’s fortunes, in particular those looking for a steady income.
In May 2017, the value of bitcoin broke through $2,000, but during this run there were several sudden drops as the future of the cryptocurrency has been called into doubt.
For instance, the price fell sharply in 2014 over fears that China would prohibit the use of bitcoin. Conversely, at times of economic stability such as the Cypriot financial crisis of 2012-2013, many investors felt they were safer converting their funds into bitcoin, causing a rise in value, according to Shai Heffetz, Managing Director of InterTrader.
However, if you had bought $100 worth of bitcoin in July 2010, your investment would now be worth over $4m. Not bad.
Are there risks with trading bitcoin?
Yes. Any disruptive technology carries a high risk, and volatile markets increase both your risk and your potential reward. This may deter you from making bitcoin a main investment, but that’s not to say it can’t form part of a balanced portfolio.
Wall Street laughed its head off when one investor said back in February that bitcoin would rise to $25,000 within the next decade.
However, with the digital currency surging 400% higher over the last year, some now concede that this prediction could become reality.