Now if you invest $1000 in Bitcoin back in 2010, it would be worth $35 million in 2017!!! Just this year alone, the price of Bitcoin has surged 330% and we are not even done with the year yet!

Unsurprisingly, I have been receiving questions about Bitcoin and whether it is time to invest in it. So let’s take a closer look at Bitcoin.

Bitcoin is one of the many cryptocurrencies in the market. In fact, there are close to 900 cryptocurrencies as of Sep 2017 and new cryptocurrencies are still created every month. Without going into the specifics, cryptocurrencies are online money (imagine your bank account savings on the internet). The technology behind these cryptocurrencies is known as blockchain.

 

 

Ok so if you are confused by now. Don’t worry, just remember three main things.

 

1. Bitcoin
2. Cryptocurrencies
3. Blockchain (I will explain this later)

What is Bitcoin?

Bitcoin is just one of the many cryptocurrencies available, similar to US dollars is one of the many traditional currencies in the world. The major cryptocurrencies are Bitcoin, Ether (ethereum), Ripple and Litecoin.

However, unlike traditional currencies like US dollars and Euro, cryptocurrencies such as Bitcoin and Ether are not produced by any single country or federal banks. Instead, they are produced by computers solving complex mathematical problems.

Now you may ask, why do these computers need to solve mathematical problems?

The purpose is to confirm transactions of these cryptocurrencies.

How do Cryptocurrencies work?

In traditional currencies, the function of confirming transactions are done by banks or international transfer agencies such as the SWIFT (The long line of codes you need to do a telegraphic transfer of money). This function is very important in our daily life as these third-party agencies help to confirm that the correct amount is transferred to the correct person. More importantly, it prevents you from spending that exact same money twice – what they called as double-spending

For example, if John is transferring $100 to Lilly, the bank makes sure that the amount transferred is $100 and is indeed transferred to Lilly. It also makes sure that $100 will no longer be in John’s account so that he won’t be able to pay another person using that same $100. Imagine if you could use that same $100 over and over again…. Oh well…

In cryptocurrencies, instead relying on the banks and other third-party agencies to confirm these transactions, it relies on the computers around the world.

Many computers are linked to the cryptocurrencies network and they will help to confirm the transactions by solving complex mathematical problems. The transaction is only confirmed when more than 51% of the computers in the network solve the mathematical problem and agree to the same transaction. This is highly secure as it is hard to collaborate with so many computers at the same time.

What is Blockchain?

Eh wait where is the blockchain then? The mathematical problem is the blockchain! Ok sort of. Let me explain.

Each time, the mathematical problem is solved and the transaction is confirmed, a confirmation key, known as a hash, is added to the ledger of cryptocurrency. A ledger is like a bank passbook. Each time you deposit or withdraw from your bank account, an entry is printed on your bank passbook to record that transaction (ok it used to be like this ok!). Similarly, a hash is like an entry on the bank passbook. It records and time-stamped the transaction that is confirmed by the network of computers, and it is recorded on the ledger of cryptocurrency instead.

So as the cryptocurrency (e.g. Bitcoin) is transferred from account to account, the ledger will be filled with hashes in chronological order, recording all the past transactions.

If it is online, can it be hacked?

Indeed, with almost everything being put online, the number of things that can be hacked are increasing, and we are seeing more and more organisation falling victim to cyber attack. Therefore, it is technically plausible to hack a bitcoin (e.g. to steal a bitcoin) but in reality, it is almost impossible. To hack a bitcoin, you need to hack the ledger first. This means you need to undo all the hashes – all the time-stamped past transactions, and coordinate with more than half of the computers in the network to create new “fake” hashes.

So while it is possible, it is very unlikely to happen. But who knows if it can be done in the future as the hackers become more sophisticated.

Should you invest in Bitcoin?

Now that you understand what bitcoin, cryptocurrencies and blockchain are, the question remains: should you invest in Bitcoin or any other cryptocurrencies? I won’t tell you what to do but I will share what I will be doing.

To me, Bitcoin is just one of the many cryptocurrencies in the world right now. Granted, it is the most widely used of aa cryptocurrencies now, there is still no guarantee that it will be the ONLY cryptocurrency of the future. It is similar to US dollars being the major currency of the world, it does not mean everyone should invest in US dollars. In fact, there may be more people using Chinese RMB and Indian Rupees as we speak. 

However, I do think the technology of blockchain is very promising. Beyond just creating a ledger for cryptocurrencies, blockchain has many real-world applications. For example, blockchain can be used in inventory management and logistics where you need to monitor the flow of goods and services. It can also be used in commercial areas whereby the order of transactions is crucial such as medical records and scientific research

Will I invest in Bitcoin?

So while Bitcoin as a cryptocurrency has gone uptremendously in value in the past years, it does seem like a bubble at this point (Remember the Tulip Mania?). Personally, I would wait a while longer to gain more clarity on Bitcoin and its real-world application. Honestly, I do not think that governments will allow a non-regulated currency such as Bitcoin be the mainstay of financial markets because this will rob the government of any fiscal or monetary control over the economy. In addition, all currencies must carry some value of sort or be backed by someone who will honour that value. (look at your dollar bills and you will see a sentence that vauge states “This is the legal tender of XXX country and XXX will honour it”.

In fact, I think countries may adopt blockchain into the traditional currencies in the foreseeable future. Now, while we still use physical bills and coins, most of our (my) assets are kept in online accounts such as saving and brokerage accounts. However, all these are monitored by third parties such as banks. If the transactions of traditional currencies are kept through blockchain instead of third parties, then the transaction fees could be lower significantly. Most importantly, the regulators can have a better grip over the flow of money in the economy. This will significantly reduce the chances of tax fraud or money laundering. In fact, many financial institutions are already exploring such possibilities.

How to find out more about Cryptocurrencies and Blockchain?

Personally, I think most laymen (myself included) should not be bothered about the detailed intricacy of cryptocurrencies and blockchain too much. We should instead familiarise ourselves with the usage of cryptocurrencies such as Bitcoin and Ether.

It is just like most of us do not understand how Visa and Mastercard payment gateway works, but we still use them when we swipe our credit cards. Therefore, the best thing you can do now is, no matter as a future investor or just pure consumer, to find out how cryptocurrencies work in real world!

Go buy a small amount of Bitcoin or Ether and try using it to buy something with them! From that process, you will figure out where to purchase, how to store, how to secure and how to pay with it. Once you are familiar with using cryptocurrencies, you will be able to make a more sound judgement about it.

Hope you learn a thing or two about cryptocurrencies and bitcoin!

See you soon!

Investing Always,

Pete

Please refer to the disclaimer here