Is there someone who still hasn't heard about bitcoin? Or is there someone whose heartbeat hasn't skipped when they heard about the jump in prices of the bitcoin?
I was reading an article about Mr. Kristoffer Koch who invested around $27 in 2009 to buy 5000 bitcoins and in 2017 those bitcoins were worth $86899725, that's a return of around of more than 4,000,000% in less than 8 years. Mr. Kristoffer invested in bitcoins while he was writing a paper on similar topic without putting too much thought into it.
If you search back in history, you won't find lot many investments who have given such high yields in such a short span of time.
So, how many of you are planning to invest in cryptocurrency? In this article, I want to talk about why I believe Bitcoin is interesting yet I would stay away from investing in it. But firstly, what is bitcoin? Bitcoin is a cryptocurrency introduced first in the market in the year 2008/2009 by a guy named Satoshi Nakamoto (no one has met him till date). The whole infrastructure of Bitcoin is based on algorithms, miners, exchanges and the wallets.
Problem with our current payment system
Our current payment system is based on Fiat Currency. It is a system where we trust a central authority and because the authority says so, we accept that as the value of money. The present system is 100 years old. Our world is changing rapidly and somehow our Fiat Currency is not able to keep pace with the current requirements. Bitcoin is able to bridge the gap.
For example, over the years, more and more transactions are happening online. Since, these deals are happening virtually, we need a third party to authenticate it. The bank is the main authority to authenticate these transactions by maintaining a ledger. Moreover, every time you transact - you are passing your information to the bank which it can use to formulate a complete map of your financial health and a lot of people don't want the bank to have all their financial information.
Secondly, Fiat currency gave enormous power to the governments to print the money at their will which leads to another problem of hyperinflation. In fact, in the short of history of 100 years, there have been 55 instances of hyperinflation. One of the worst instances of hyperinflation was in Zimbabwe where the value of currency was less than a toilet paper.
Nationalistic in Nature
If you are traveling from one country to another, you need to exchange your currency with the currency of the country you are visiting. While it sounds simple but every day, six trillion dollars of foreign exchange transactions happens. If we put fees of half a percent to over 15 per cent of the transactions, then a lot of money just goes in transacting the money. Moreover, it is very cumbersome to keep track of small amount of transactions.
Above are serious issues with the present Fiat currency system. 'Bitcoin' came at the right time to solve all these issues. Bitcoin is a global currency you can transact from any country to any country without any currency conversion. It is limited in number, therefore, while its price will increase but there won't ever be hyperinflation as no one can print it infinitely. Lastly, Satoshi has built a powerful infrastructure at the backend and an incentive mechanism for the miners, due to which, we don't need any 3rd party to keep a record of our transactions.
Isn' Bitcoin just great? If I am so much optimistic about Bitcoin, then why I won't invest?
Too optimistic: Whenever I invest in a company's stock, I always ask myself 'How much price is due to optimistic nature of people.' While people have already compared it to next big development after Internet, though I believe they have valued it way too higher because the inherent benefits of Bitcoin are also the biggest concerns, which stop it from becoming a mainstream currency. For example: If no one has the information of the transactions i.e. where the money is moving then it creates a lot of issues. For example, a big usage of Bitcoin currently happens on the Deep Web where people do want to hide their credentials.
Moreover, governments like to have some control over the finances of the people to stop them from doing something illegal.
Multiple CryptoCurrency: While there are still a lot of questions to be answered, one of the big questions is whether we work on a single cryptocurrency or multiple cryptocurrencies and if we decide to work with single Cryptocurrency then which one to choose and who is going to decide that currency. Again do we need a government like body to decide this. If we leave it to the public, then every time the price of a cryptocurrency goes beyond the roof, we will jump to the other one with less value and repeat the process.
Exorbitant returns: People are still saying that Bitcoin can go higher because of its limited number. There is only 21 million bitcoin that can be mined. However, it is becoming like a Ponzi scheme (with a good product in the background) as there is no upper limit or lower limit.
Bitcoins and other cryptocurrencies are making noise for the right reason but it is important to understand the true value of any product and not to invest just because everyone else is talking/investing into it.
Disclaimer: I don't own any Bitcoin at this point in time and neither do I have any plans to buy them in future.