What is Bitcoin?

What is Bitcoin?

Bitcoin is commonly known as the currency of the internet. Others describe it as a big gamble given it's price volatility versus other currencies. A more technical definition would describe Bitcoin as a network whereby everyone involved shares a list of Bitcoin owners. When Bitcoins are traded (eg for cash) then both trading parties have to agree on the transfer, after which the list is updated.

Still unsure of what Bitcoin is?

Bitcoin is open source software. This means that anyone can update the software, but all users must agree any changes. Bitcoin is really an innovative means of data storing and data sharing. The fact that it has become a currency rests on the fact that people attribute a value to it. There is no central bank controlling the money supply and there is no underlying reserve value such as gold reserves backing a portion of the dollar.

I'm still not getting it? Simply. What is Bitcoin?

To you and me Bitcoin is a currency. I have my store of Bitcoins and as long as everyone accepts that Bitcoins have a value then I can exchange my Bitcoins for goods or cash.

Why has the Bitcoin price been so volatile? 

Bitcoin's price is volatile due to the hype and speculation surrounding the web-based currency. Since the supply is relatively "fixed", price fluctuations are mainly determined by the demand for Bitcoin. As more people became aware of Bitcoin, and there hype built up, more people bought bit coins, pushing the price up well in excess of $1,000. Recently, the price crashed following controversy involving the potential theft of  a quarter of a million dollars worth of Bitcoins.

Is Bitcoin a good investment?

Absolutely and emphatically not. I'm so sure of this that I'm tempted to argue the point as objective fact rather than my subjective opinion. The problem with Bitcoin is that it's valuation is not based on any fundamentals. In contrast, when looking at a share price you can look at the underlying business and make an educated guess at its valuation by looking at its Assets and ability to make a profit. In the case of Bitcoin there is nothing upon which to base your valuations. Bitcoin price movements are totally determined by speculation.

But I really want to invest in Bitcoins!

If you just can't help yourself then please be careful. I would suggest only buying a few Bitcoins to speculate on the price for a bit of fun. I certainly wouldn't put any serious amount of my savings into Bitcoin. Rather, treat investing in Bitcoins like going to the casino - the minute you walk into a casino write off the money that you are going to inevitably lose. That way, if you manage to make a profit then that's a bonus!

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Wealth Tortoise said...

I agree with you Mr Moneybanks. You'd be pretty daft to consider Bitcoin a sensible, stable or long-lasting investing tool. You're right, there's nothing objectively tangible backing them, only a blind faith people have at the moment that their value will go up, which is has, know what they say about what goes up!...

Leonard @ The Wallet Doctor said...

This is some solid advice. Bitcoins are unpredictable right now, and investments should be made with extreme caution. Thanks for the breakdown!

Mr. Moneybanks said...

...must come down. But some people love a gamble and that's fine. They should treat it as one - like having a spin on a roulette wheel - maybe get lucky

Mr. Moneybanks said...

Thanks Leonard. They're really not so straightforward to understand. It pains me that there's so much hype around them and yet no one really knows what they are.