Worth the Hype? Bitcoin

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Created in 2009, Bitcoin is a decentralised digital currency (cryptocurrency) that allows users to transfer funds anywhere, anytime. Its rapid increase in traction has inspired a generation of digital currencies, with well over 1000 in existence as of today. It currently sits at the #1 spot, having a market cap that’s almost quadruple that of its biggest competitor, Ethereum.

Just like Gold, there is only a finite amount of Bitcoin. You can’t just print more when you want to pay off your country’s debts or fake it in a run-down Colombian warehouse. Currently, there are just under seventeen million Bitcoins in circulation, with a maximum supply of 21,000,000.

Growing by more than 1300% in the last year, Bitcoin has attracted many sceptics who don’t see its appeal. So, Bitcoin: Worth the hype?

Issues with mass-adoption & real-world usage:

While intended to be used as a currency, Bitcoin is almost entirely used as a form of investment, as opposed to a replacement of traditional money. This is largely due to the rapid increase in price making it foolish to spend, but also in part due to a few speed-bumps that I’ll come to later.

It’s because of this, that Bitcoin is unlikely to be viewed as a usable currency for a very, very long time. With a maximum supply of 21,000,000 Bitcoins, placing the total possible market-cap (Based on the current price) around $210 billion, there simply isn’t enough value for it to replace traditional fiat money. America’s GDP currently sits around $18.57 trillion, meaning that one Bitcoin would have to be valued at $884,285 just to match the US’ GDP. Let alone the rest of the world.

Bitcoin’s Transaction Fee:

Currently, the way that Bitcoin fees are currently calculated, the bigger the transaction, the bigger the fee is (Which is set in Bitcoin) meaning that a rapid increase in Bitcoin’s price can lead to absurdly high fees. Imagine going to pay for a coffee and finding out that it will cost you $14 instead of four because the fee is so high. By the same token, imagine looking back over your monthly spending and finding that the coffee you bought four weeks ago, in Bitcoin, would have been worth double if you had just held onto it for a little longer.

Bitcoin’s Transaction Time:

Due to the complexity of the Blockchain network, which ensures your transactions are secure and, more importantly real, transaction times with Bitcoin aren’t the best. Depending on the time of day, Bitcoin transactions can sometimes take hours.

I’m not going to go into detail about how the transactions are processed now, but basically, the more total hashing power of the network (More miners) the higher the difficulty of mining. This is done to ensure that the transaction fee stays somewhat consistent and miners don’t start profiting too much/ not enough for their work. If a large proportion of the miners suddenly stop mining Bitcoin then (For a brief period of time) the transaction time will increase massively, until the difficulty is updated.

A great example of this is the recent price manipulation of Bitcoin Cash. Almost 50% of the Bitcoin hashing power switched over to Bitcoin Cash, causing the number of unconfirmed BTC transactions to jump up to over 100,000. I’ll talk more about the issues with centralisation later on.

Fractional Price Issues:

As I already mentioned, due to the relatively short supply of Bitcoins, they’re going to have to become much more expensive in order to take over. As is already the case, small purchases are fractions of a whole Bitcoin. This will only get worse as the price increases.

For example, if Bitcoin was (theoretically) priced at $1m then a four dollar cup of coffee would set you back 0.000004 Bitcoin. That’s a whole lotta zeros to work out on the spot while your coffee is getting cold on the counter. Sure, QR codes make this process incredibly easy, however, it’s still an issue. Just like with cents, quarters, dollars & pennies, Bitcoin needs to introduce some smaller denominations that make working with smaller amounts easier.

There is a system like this already in place with Bitcoin, but it leaves a lot to be desired. You have mBTC (0.001 BTC) as well as Bits (0.000001 BTC) and Satoshis (0.00000001 BTC) but it’s not as easy to grasp as traditional denominations.

After speaking to a number of people about Cryptocurrencies (Bitcoin mainly) it’s incredible how many people don’t realise that you can actually send portions of a coin. You don’t have to buy/spend whole Bitcoins at a time.

How Decentralized Really Is Bitcoin?

One of Bitcoin’s main selling points is that it is a decentralized. There’s no single management that controls everything or stores the data and there’s no single-point of failure. This makes the currency appealing to those who don’t trust their government, bank, or any large group of authority for that matter.

While it is true that the Blockchain technology is fully decentralized, a lot of the systems and services that support the network aren’t. Take the miners for example. They help process the transactions and keep everything running smoothly, yet more than 75% of the mining power is controlled by just six mining pools. If any of those six were to shut down, stop supporting Bitcoin & Instead support an opponent like Bitcoin Cash, then there would be massive disruptions to the network for days.

Exchanges are also heavily centralised. A massive proportion of the daily cryptocurrency trades run through a tiny fraction of the available exchanges. If one of those were to temporarily go offline, or even run-off with your Bitcoin, there would be widespread pandemonium faster than you can say “Tulip Mania”. This won’t be a concern forever, as decentralised exchanges are already under development. They are far safer but more difficult to understand.

How Is the Price of Bitcoin Set?

Before we talk more about BTC’s future, it’s important to first understand how the price is set. Simply put, the price of BTC is based on supply & demand. Just like with stocks, there are hundreds of online exchanges that allow you to purchase Cryptocurrencies, using other Cryptos and sometimes traditional money.

When using an exchange (For example, Bittrex) you are able to set a BID (The price you are willing to pay as a buyer) or an ASK (The price you are willing to sell for) If the exchange can find a BID order on/above your ASK then the order will be fulfilled and your currency of choice will enter your account, and vice versa. Each exchange has a recommended price for each currency, which is usually an average across all of their current buy/sell orders.

Sites that document Crypto price, such as CoinMarketCap, use an average across a number of exchanges. Prices can sometimes vary massively across exchanges, due to their individual demographics. It’s a good idea to use a charting site like TradingView that will allow you to check a coin’s price across a number of exchanges. Just search the Coin that you want to monitor and pay attention to the exchange name on the right-hand side.

Are Cryptocurrencies in a Bubble?

There’s been a lot of talk about the similarities between Bitcoin’s rapid rise and past examples of financial bubbles. Is this the case? Well, the truth is that no one really knows. Many financial and economics “experts” who claim the currency is in a “bubble about to pop” have come to their decision because Bitcoin’s rapid growth somewhat matches up with few & far-between examples of historical financial bubbles.

In layman’s terms, a price bubble is when an asset, in this case, Bitcoin, is valued much, much higher than it is worth. The idea is that people’s greed & unwillingness to see past the price increase leads to a massive overvaluation that comes crashing down when people realise the asset’s value is microscopic compared to its peak evaluation. It’s easy to see how, without proper research and understanding of the new & emerging market, Bitcoins price aligns almost perfectly with the below graph: a theorised example of a financial bubble.

But, by the same token, Bitcoin’s price increase matches up pretty much perfectly with some of the biggest companies in the world. Sure, Bitcoin has done in five years what Apple & Amazon have done in decades but their growth is much more relevant than a handful of financial bubbles that happened in the seventeenth & eighteenth centuries.

Apple

Amazon

Bitcoin

It’s not just the rapid price increase that makes Bitcoin a bubble, the critics say, it’s the fact that it has no real value at all. While I’ve touched on a few of BTC’s issues earlier on in the article, it’s important to note that it has many positives:

  • Freedom: Bitcoin allows you to send money anywhere in the world, at any time. There’s no international transaction fee, varying wait times depending on the time of day, the location you are sending the money to, or whether it’s a bank holiday or not. Nor is there any reason to worry about political tensions between governments or your money being seized by a central authority.
  • Control: You have full control over your money. You can access it at any time, from anywhere. You choose exactly what you pay for, merchants can’t sneak in hidden fees & your personal information isn’t tied to the transaction.
  • Fees: There’s no monthly fee to keep your money in your account. Transaction fees, usually, are incredibly cheap and there’s no extra fee for international transactions/ currency conversions. Every transaction is treated the same.
  • Transparency: Anyone can see transactions (Amounts, not personal information) and verify transaction validity on the blockchain. It’s a decentralised currency (At the core) meaning no government or organization can interfere, manipulate, or simply print more of it when they want to pay off a debt.

Whether you believe it has intrinsic value, or not, there are many other reasons why a large-scale Bitcoin crash would be nearly impossible. For starters, the split between the number of people buying Bitcoins & the number of people selling is immense. Some exchanges put it at 93% buyers 7% sellers. While many new, small-time investors may begin to panic if the Bitcoin price suddenly dips, and begin to sell at below market value prices, the true Bitcoin whales will do the exact opposite. They’ll pump more money into the currency to capitalize on the dip & ensure its longevity. A prime example of this is when billionaire Mike Novogratz heavily invested in Bitcoin during the recent dip.

There are over 120 Hedge Funds currently invested in Bitcoin and that number is only set to increase as the weeks go on.

When Should You Sell Your Bitcoin?

I see this question asked all the time! The truth is, no one knows. If I listened to what other people had told me, I would have sold my Bitcoins off at $1000, $5000, $10000 and everywhere in between. Here’s the way I see it:

If you truly believe that Bitcoin is the future and, in years to come, the Pound, Dollar & Euro will cease to exist, then there’s no need to sell your Bitcoins. Ever. By the time that the currency takes over, on its approach to $1m, there will be no point in exchanging it for fiat money, because that will be a thing of the past.

However, if you view Bitcoin as more of an investment, as many people do, then my advice is irrelevant. It’s all about establishing the risk vs reward for you personally. For me, after buying Bitcoin at $500 and $2000, the reward of it rising into the high five figures greatly outweighs the risk of it crashing because, even at $5000, it will still have been an amazing investment. On the other hand, if I bought in at $9000 I would be a lot more eager to sell if things took a turn for the worse.

It’s all about narrative:

When you’re reading articles about Bitcoin, or any topic for that matter, it’s important to think about the source. Who’s writing the article and what do they hope to gain from putting their opinion out there? Bitcoin’s rapid rise has attracted many die-hard fans, yet just as many (If not more) die-hard critics.

So it’s no surprise that banking giants like JP Morgan would come out publically and denounce the currency as a “fraud that will ultimately blow up” (On a side-note, some people suspect the CEO’s comment was meant to drive down the price of Bitcoin, so they could later invest and profit greatly) because, ultimately, every dollar invested in Bitcoin is one moved away from the banks.

On the other hand, there are many people with large amounts of money invested in Bitcoin who may profit greatly from producing articles that paint Bitcoin to be a flawless invention that is bound to make anyone rich instantly. They may even promote affiliate services and courses in the articles, in order to directly profit from their audience.

While it is true that I have a lot of money invested in Cryptocurrencies, I have attempted to keep this article as unbiased as possible. Any links to outside services/sources are completely free (Besides exchanges, obviously) and I don’t profit in any way from your actions on these services.


 

Hopefully, the above article gives you a better insight into Bitcoin and helps you make an inform decision about investing. Let me know in the comments section your thoughts on Cryptocurrencies.

 


Take a look at the current price of Bitcoin. How much has it changed since I posted this article?

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