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Bitcoin is all over the place.
Since the beginning of the year, Bitcoin has more than quadrupled in price, going from under $1000 per Bitcoin to nearly $4700 at its peak in late August. The year before, Bitcoin doubled in price, going from about $450 to $950.
What’s remained true in the last two to three years is that the price of Bitcoin continues to trend upwards, often exponentially so and not without a lot of instability.
As Bitcoin gained many followers and tons of exposure, it opened the door for other types of cryptocurrencies to become popular. One such currency, known as Ethereum, quickly gained in popularity, so much so that it is second only to Bitcoin regarding market capitalization. Ethereum is similar to Bitcoin in many ways. Today, there are at least 100 different coins out there, from the useful to the completely useless.
What is Bitcoin?
Bitcoin is a lot of things.
Simplistically you can think of Bitcoin as internet cash. Some people mine Bitcoin using powerful computers. These souped-up machines perform millions of calculations, basically solving countless math problems, which then unlock a specific amount of Bitcoin. These miners can then sell it or hoard it at their pleasure. It’s a bit like gold or another precious metal in the sense that you have to “mine,” or perform hard work, to attain Bitcoin. There’s also only meant to be 21 million Bitcoin available ever, so it’s similar to gold in that there’s scarcity attached to it.
Bitcoin is valuable, and there are three different ways to think about why it is so useful.
- It is a highly efficient form of exchange. Money can be transferred to anyone in the world almost instantly. While there are growing pains, Bitcoin is meant to be frictionless and allows people to move funds around quickly and at minimal Today, a money transfer can be hard to navigate. Companies and banks charge crazy fees, and exchange rates-margins eat away at hard-earned funds.
- It is safe and private. While many people think Bitcoin is entirely anonymous, that’s not the case. It can be very private if you take steps not to link your personal details to your Bitcoin wallet.What is interesting is that all the transactions that take place using Bitcoin are recorded and stored in a public ledger, called the blockchain. Every transaction is linked to every other transaction (like a chain!), and because of this, it is tough for attackers to penetrate. It’s a bit like untangling the wires of your headphones. You can’t just pick at the ends, you have to start at the root, which takes time. Extrapolate this idea to the blockchain, and you quickly realize that you would need the computing power of the world to hack into the blockchain.
- It is free from government control. A big issue people have with currency is that lay people are at the mercy of government Decisions made from above, decisions that do not have people’s best interests at heart perhaps, can affect the value of the currency and therefore people’s net worth and livelihoods.
Should you invest?
If you believe that the world is heading towards digital forms of everything, including currency, then Bitcoin isn’t a bad bet. It’s advised to know that that is all it will be for the time being, a gamble.
But should you buy right now? Bitcoin is around $4000 right now, and you’re probably wondering – what’s the point now? How much further could it possibly go up? Isn’t it in a bubble?
Those are great questions but let’s try and get a sense first of how much a single Bitcoin could be worth.
How much a Bitcoin is worth has a lot to do with how many people are using it. Let’s say that Bitcoin attains the status of gold, a commodity that it often been compared to. Very simply let’s compare their market capitalizations, or what it’s worth as a whole.
If you stacked up all the gold in the world, conservative estimates indicate that would be 170,000 tons, and each ounce is worth $1300, then all the gold in the world would be worth $7 trillion. Bitcoin’s market cap (as of Sept 18, 2017) is $66.5 billion. At those valuations, gold is worth more than 100 times Bitcoin’s current market cap.
What that means is if Bitcoin were treated like gold, we could expect Bitcoin to have a market cap similar to gold. We also know that there are only going to be 21 million Bitcoin mined ever, so $7 trillion divided by 21 million Bitcoin gives us a final Bitcoin price of USD 333,333. If you said Bitcoin’s price could increase 100 times to match gold’s market cap, you would get a final price of $400,000. With Bitcoin currently worth just under $4000, there’s a long way to go.
Source: Bitcoin News
But if Bitcoin were to only attain the status of silver, with a market cap of $38 billion, then Bitcoin would only be worth around $1800.
There’s a plenty of upside here. If Bitcoin were to somehow replace the US dollar, a single Bitcoin could easily be worth as much as $1 million.
The final word
If you believe that Bitcoin, or the concept of digital currency, is here to stay, then it makes sense to invest. However, one must invest knowing that the value of your holdings could go to zero. It’s possible that Bitcoin completely collapses. There’s also a good possibility that Bitcoin gets overtaken by another currency.
There have been many occasions in history when the frontrunner in a technological niche did not end up becoming the most popular, or when the market leader in a business sector ceded ground to its challengers. Microsoft was the big dog at one point, but then Apple quickly overcame it.
The best course of action is to invest only what you can afford to lose, similar to playing at the casino, and own a diversified set of cryptocurrencies. Many investors will invest only 1% of their total portfolio in purely speculative efforts. Of that 1% you can split up your holdings between Bitcoin, Ethereum and a maybe buy some ICOs as well. This way, if Bitcoin or another currency explodes you will be ready and have some exposure. A 100x increase in this part of your portfolio will still change your life but if you lose it all, just make sure you don’t lose too much sleep along with it.