Had you spent $27 on Bitcoin when it was produced by Satoshi Nakamoto in 2009 your investment would now be worth over $37,000,000?
Widely regarded as the best investment vehicle ever, Bitcoin has seen a meteoric rise during 2017 going from $777 all the way to $17,000.
Creating millionaires out of opportunistic investors and leaving financial institutions open-mouthed, Bitcoin has answered its critics at every milestone this year and some believe that is just the beginning.
The launch of Bitcoin futures on December 10th, which for initially allows investors to enter the Bitcoin market through a major regulated US exchange, implies that we are only getting started.
Why is Bitcoin so valuable is that there’s a finite amount in existence. There will only ever be a maximum of 21 million Bitcoins and unlike normal fiat currencies, you can’t just print more of these once you feel like. This is because Bitcoin runs on a evidence of work protocol: to be able to create it, you have to mine it using computer processing power to resolve complex algorithms on the Bitcoin blockchain. Once that is achieved, you are rewarded with Bitcoin as payment for the “work” you have done. Unfortunately, the reward you get for mining has decreased drastically almost annually since Bitcoin’s inception, meaning that for many people the only viable way to have Bitcoin is buying it on an exchange. At the existing price levels is a risk worth taking?
Many believe Bitcoin is merely a bubble. I spoke to cryptocurrency expert and longterm investor Duke Randal who thinks the asset is overvalued, “I’d compare this to many supply and demand bubbles over histories such as for instance Dutch Tulip Mania and the dot com bubble of the late 90s. Prices are purely speculation based, and when you look at Bitcoin’s functionality being an actual currency it is almost embarrassing.” For individuals who don’t know, the dot com bubble was an interval between 1997-2001 where many internet companies were founded and given outrageously optimistic valuations based purely on speculation that later plummeted 80-90% whilst the bubble started to collapse in early 2000s. Some companies such as for instance eBay and Amazon recovered and now sit far above those valuations but for others, it was the conclusion of the line.
Bitcoin was originally created to be able to take power far from our financial systems and put people in control of their particular money, eliminating the middle man and enabling peer to peer transactions. However, it is now among the slowest cryptocurrencies on the market, its transaction speed is four times slower compared to the fifth biggest cryptocurrency and its nearest competitor for payment solutions Litecoin. Untraceable privacy coin Monero makes transactions even quicker, boasting a typical block time of just two minutes, a fifth of the time Bitcoin can get it done in, and that’s without anonymity. The world’s second biggest cryptocurrency, Ethereum, already has a higher transaction volume than Bitcoin despite being valued of them costing only $676 dollars per Ether compared to Bitcoin’s $16,726 per Bitcoin.
So why is Bitcoin’s value so high? I asked Duke Randal exactly the same question. “All of it dates back to exactly the same supply and demand economics, relatively there’s not quite definitely Bitcoin available and its recent surge in price has attracted a lot of media attention, this combined with launch of Bitcoin futures which many see as the first sign Bitcoin will be accepted by the mass market, has resulted in a lot of people jumping on the bandwagon for financial gain bitcoin mixer. Like any asset, if you have a greater demand to buy than to offer, the price goes up. This is bad since these new investors are entering the marketplace without understanding blockchain and the underlying principles of these currencies meaning they will likely get burnt “.
Another reason is that Bitcoin is incredibly volatile, it has been recognized to swing up or down thousands of dollars in under a moment which if you should be not used to nor expecting it, causes less experienced investors to panic sell, causing a loss. This is still another reason Bitcoin will battle to be adopted as an application of payment. The Bitcoin price can move substantially between the time vendors accept Bitcoin from customers and sell it to exchanges due to their local currency. This erratic movement can eliminate their entire profitability. Will this instability go away anytime soon? Not likely: Bitcoin is just a relatively new asset class and although awareness is increasing, only a very small percentage of the world’s population hold Bitcoin. Until it becomes more widely distributed and its liquidity improves significantly, the volatility will continue.
So if Bitcoin is pretty useless being an actual currency, what are its applications? Many believe Bitcoin has moved on from being a viable type of payment to becoming a store of value. Bitcoin is similar to “digital gold” and will simply be properly used as a benchmark for other cryptocurrencies and blockchain projects to be measured against and traded for. Recently there has been stories of men and women in high inflation countries such as for instance Zimbabwe buying Bitcoin to be able to retain what wealth they have as opposed to see its value decline underneath the recklessness of its central banking system.
Can it be too late to get involved with Bitcoin? In the event that you rely on what these cryptocurrencies can do for the world then it is never too late to have involved, but with the price of Bitcoin being so high can it be a ship for a few that has already sailed. You could be better off having a look at Litecoin, up 6908% for the entire year or Ethereum which is up an incredible 7521% for the year. These newer, faster currencies hope to achieve what Bitcoin first attempted to do back its inception in 2009 and replace government-run fiat currencies.
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