Published 15 November 2017 Category: Business Insight, Entrepreneurs, SMEs, Startups

Buying Bitcoins? Read This

Many investors are asking: Should I buy bitcoins or other cryptocurrencies? And if not, why? Nearly every day bitcoin and other cryptos are making headlines. Some experts call them the new gold. But are bitcoin, Ethereum and other digital currencies real investments or a speculator's game?

Opinions are divided, with many experts warning investors to stay away or proceed with great caution. Here’s why investors should be wary of bitcoin. Far from being safe, the bitcoin market looks more like the 1840s gold rush. Many rushed in, but few got rich. But is it too late to invest in Bitcoin?

China recently banned initial coin offerings and trading in cryptocurrencies, and it may not be the last government to act on concerns about giving up control over the flow of funds, the ability to monitor taxable gains or appearing vigilant in protecting investors. But many retailers are accepting bitcoins as payment, including Microsoft, Target, Home Depot and Subway. And more uses are in the works.

What is bitcoin?
Bitcoin arrived on the scene in 2009. The digital currency is created and held electronically. Its value stems partly from the fact that it's decentralised; no single institution or government controls the network. It was developed based on a proposal from a software developer called Satoshi Nakamoto, according to CoinDesk, which tracks cryptocurrency prices and reports on events in the crypto space. Low transaction costs are another feature along with instantaneous transfers.

Perhaps its biggest attraction is that its supply can't be increased or decreased at the whim of a controlling entity. Similar to gold and other precious metals, bitcoins can be "mined," but it's done by using computing power in a distributed network. And like gold, bitcoin supply is limited.

Bitcoin rules state that only 21 million bitcoins can ever be created, though the coins can be split into smaller parts. That could make bitcoin, like gold, an attractive inflation hedge. There are 16.67 million bitcoin in circulation now. On the other hand, the potential creation of new digital currencies creates "the possibility of limitless supply of different cryptocurrencies," undermining the value of existing ones.

What is Blockchain?
The underlying technology securing bitcoin is known as the blockchain.

Bitcoin vs. gold
Critics warn of a bubble because the relatively high volume of cryptocurrency turnover, against limited real-world use, suggests that many buyers are seeking speculative gain, never intending to use cryptocurrencies to make a real-world transaction.

The blockchain software behind bitcoin makes the digital currency a method of transferring value, but unlike at, say, a bank or real estate company. With blockchain, those expensive middlemen are no longer needed to ensure a transaction takes place as intended, a protection supplied by the blockchain software itself. The result: faster and cheaper transactions.

And since blockchain and cryptocurrencies offer various layers of anonymity, they are seen as attractive to those living in countries where transfer of wealth is restricted. Detractors say cryptos also draw drug dealers, money launderers and tax dodgers along with legitimate investors.

How people invest in digital currencies
Those who want to own cryptocurrencies directly can go to exchanges to buy and trade them. Some of the largest are Coinsetter, Coinbase, Cryptsy, London-based Bitsamp and Bulgaria-based BTC-e. They'll need what the industry calls a wallet to store the private keys that give access to cryptos. Major exchanges offer soft, or hot, wallets for customers. Such wallets are available for desktop computers and mobile devices and include bitcoin wallet, Mycelium, Xapo and Blockchain, according to Coindesk.

Hard wallets in the form of flash-drive like devices bring an extra layer of security, by limiting exposure to the internet. They have to be plugged into a computer or phone before they can be spent. Three popular ones, according to Buybitcoinworldwide.com, are Ledger Nano S, KeepKey and Trezor. Just remember, don't lose it, forget your password or fail to back it up, or you might lose your cryptocurrency forever.

Bitcoins are not printed like regular currency, instead, they are produced by people and businesses. The reason bitcoin has gained a lot of popularity is due to its anonymity as well as the fact it has no government control. This is one of the main features that makes bitcoin so appealing to people. Furthermore, the price of a single bitcoin exceeded the value of an ounce of gold in march 2017.

It is thought that there are as many as 5.8 million bitcoin users who have cryptocurrency wallets.