There’s a lot of hype in the market at the moment with regard to Bitcoin. Almost every session on my weekly radio segment, a listener is asking;

1) what is it, and

2) is it a good investment?

This article is not to provide financial advice, rather to educate as to what Bitcoins are. You can decide if it is a classic bubble or genuine form of investment and store of value. If you are considering it for your superannuation fund, just think as to how it will provide you income in your retirement.

The Basics

First and foremost, no one actually knows who created Bitcoin. Someone came up with the idea of a ‘digital currency’ which can be created by people using computers to solve complex mathematical problems. The complex problem has no value itself, other than proof that it has been done and creating the Bitcoin. These people are called ‘miners’ as they essentially create Bitcoins.

With 1 Bitcoin now worth $16,800 USD or $22,000 AUD – Bitcoins are now threatening the environment. A recent article suggests Bitcoin mining ‘uses more energy than it takes to keep New Zealand’s lights on’. Not an environmentally sound at all.

Bitcoin by its very creation is reasonably shady. It was developed on the dark web for people to send money to one another anonymously. Think about that for a moment… what type of person does that appeal to? Terrorists, money launderers, foreign governments with trade restrictions… you get the idea. At the same time, there is no single organisation to control it, no regulation, no Royal Commissions or redress if something is hacked etc.

China at one point accounted for 90% of Bitcoin trading volume, but now only around 7%. It suggests more investors or miners entering the market. China also houses a large number of miners that use purpose built machines which are optimised to solve these complex algorithmic problems.

The positives for Bitcoin are that their fees are lower, there are no limits, and accounts can’t be frozen. Public distributed ledger systems are used to record the transactions, and this is known as Blockchain technology. It is these positives though that attract unscrupulous participants.

Flowers and bubbles

One billionaire hedge fund manager described it as having “elements of tulip bulb mania”. Recall these types of markets are all based on supply and demand. Markets in general are driven by fear and greed.

Tulips (believe it or not) were in high demand in the 1600's. Their prices sky rocketed to the point where someone could trade one tulip for a house. But with the bubble prices came increased supply – which then of course popped the price. Some tried to sell, but no one was buying.

If something is to be hacked, what are you left with?

We are clearly in the greed part of the market, what happens when the fear kicks in?