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Bitcoin: Should You Invest In This Cryptocurrency?

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Bitcoin: Should You Invest In This Cryptocurrency?

Bitcoin has been around for nearly a decade but its price reached record highs in 2017. With talks of a recession looming around the corner, Bitcoin and other cryptocurrencies are gaining momentum with investors and consumers, for varying reasons. Some are looking to escape the dollar's devaluation while others want to capture gains from a rising digital asset. Still, others simply want the freedom of anonymous transactions.

But whatever the reason, most are now viewing Bitcoin a legitimate asset class. Last month, the digital cash's market capitalization of nearly $75 billion exceeded that of Netflix, although a recent downswing has Bitcoin trading at under $4,000 at the time of this writing.

Is Bitcoin really a store of value?

For money to be valuable, it needs to be recognized as a credible medium of exchange. Gold, for example, has historically been a universally-accepted store of value. So is there value in treating Bitcoin the same?

Bitcoin and other cryptocurrencies are used to send anonymous electronic payments anywhere, anytime. The transactions take place directly between two parties, which cuts out the middleman including banks and government authorities. More businesses are accepting Bitcoin as a form of payment because fees are lower and merchants typically get paid faster.

Moreover, Bitcoin transactions are deemed secure because of blockchain technology. Blockchain is made possible through a network of computers located around the world. Transaction processors, known as miners, invest in CPU and electricity to validate Bitcoin transactions and to prevent fraud. Blockchain is a primary reason why Bitcoin transaction costs are often much lower than electronic payments that rely on third parties such as banks.

Exploring Bitcoin’s value

If you’re new to cryptocurrencies, you should know that Bitcoin isn't subject to inflation, unlike fiat cash. And many argue that's the reason for Bitcoin's steep rise in valuation. Only 21 million Bitcoins will ever be mined, therefore, it carries minimal or no exposure to inflation within its user base.

Consider that the U.S. dollar has devalued nearly 97 percent since 1913. And with talks of a potential fourth round of quantitative easing (QE4) by the Federal Reserve, global investors, as well as holders of fiat dollars, are nervous that they're piling up cheapening cash. In contrast, the limited quantity of Bitcoin attracts more investors and speculators and drives its price ever higher on exchanges. Like gold, it isn't subject to monetary manipulation by central banks or the government. And like gold, the limited circulation makes Bitcoin a scarce commodity-money.

You can try to buy Bitcoin, if someone's willing to sell. You can get U.S. dollars anywhere, including Third World countries and even the black market. When something's too easily available, it loses its shine.

Bitcoin does have famous skeptics. Warren Buffet elaborated about Bitcoin’s lack of value in a recent statement. "It's a method of transmitting money," he said. "It's a very effective way of transmitting money and you can do it anonymously and all that. A check is a way of transmitting money, too. Are checks worth a whole lot of money just because they can transmit money? The idea that it has some huge intrinsic value is just a joke in my view."

And others warn that Bitcoin is an example of a bubble, including JPMorgan Chase CEO Jamie Dimon.

But whatever the sentiments of key business leaders, Bitcoin is seeing wider adoption as well as similar applications with traditional financial instruments. Are thousands of Bitcoin holders really on the wrong side of history?

China’s OKCoin is the first major exchange to offer investors the ability to trade futures in Bitcoin. Since a future price can be locked in, options can hedge a part of the cryptocurrency's volatility. According to this comprehensive guide, a futures contract is “an obligation to buy or sell a specific quantity of a certain commodity or asset on a future date at an agreed upon price.”

For risk-averse investors, trading Bitcoin futures might be a less risky route. That is, it'd be one way to minimize the impact of volatility. Interestingly, price levels of many cryptocurrencies are often affected by positive or negative media coverage.

So is Bitcoin here to stay?

Skeptics maintain that electronic coins don't have, and shouldn't have any inherent value. However, investors have real concerns about the continued devaluation of fiat currencies by way of printing massive amounts of cash. What have they got to lose? If the U.S. dollar is going to lose that much value over the long-term, dollar holders lose out anyway, so it'd be better to find an alternative form of cash that might even appreciate in value.

Central banks around the world are printing cash to finance their respective government's deficit spending. If Bitcoin gains further legitimacy as a medium of exchange, it could eventually be regarded as a historic innovation.

 

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