We are living in a digital world today. Everything around us is online. You can correspond with people online, you can trade online, and you can transact business online. In this age of online transactions, you frequently hear the word “Bitcoins“. Many countries have legalized the Bitcoins with the USA proposing to treat it as a commodity such as oil or gold. At the same time, many countries such as India are maintaining a wait and watch policy. Under such circumstances, you should think twice before investing in Bitcoins. We shall now look at both sides of the story and get a clear picture.
Bitcoin is a virtual currency. You will not be able to touch or see it. They are present in the form of ledger entries on a giant virtual ledger against your name. You can of course, transfer the bitcoins from person to person using a smartphone or a computer without the intervention of any financial institution. The question that arises now is who can create a Bitcoin. You should know that a central bank or a Government do not create bitcoins. Only Bitcoin miners capable of solving complex math problems using algorithms can create Bitcoins. Thus, the Government does not have any control over its creation. However, you should note that there are limited numbers of bitcoins available. Once the number of bitcoins reaches the cap that is a little less than 21 million, it will stop. You will not be able to create new bitcoins.
Advantages of bitcoins:
- The price of a Bitcoin depends on the market position. As on date, the price of one Bitcoin is around $640. There are expectations that the rate might touch $1000 by 2017. Once you reach the cap, the price will increase.
- Today, more business entities are accepting bitcoins as legal tender. This includes Barclays, PayPal, as well as Amex. Visa is also exploring possibilities of entering the market soon.
- The advantage of Bitcoins is that robbers cannot steal them as they do with hard cash. You need a complex password to access your Bitcoin account to trade or transfer them from person to person.
- Transacting in bitcoins is quite easy, as it does not involve the intervention of a financial institution. The transaction occurs between peer to peer on an online basis instantly.
- The Compounded Annual Growth Rate (CAGR) is the highest among other commodities such as real estate, gold, oil, etc.
- Bitcoin transactions are irreversible.
- Bitcoin is a good hedging tool.
Disadvantages of bitcoins as an investment:
You have seen some of the advantages of investing in Bitcoins. You should know the disadvantages too. We shall enumerate some for you.
- The price of Bitcoin is market driven. It can fluctuate. You could see that the price of one Bitcoin had touched $775 in the last week of May this year. However, today the price is around $640. This uncertainty may be due to the ‘Brexit’ factor. Read : Learn About the Bitcoin Trading Market
- People can argue that the monies available in your bank accounts are also mere ledger entries somewhat similar to Bitcoins. However, you should know that the money in a bank account is a liquid asset. You can withdraw it anytime and convert it into cash. In addition, the Government of the country guarantees its value. You would not find the same with Bitcoins.
- Bitcoin is an intangible asset. Even though you can trade in Bitcoins in the market, you cannot compare it with the shares of the Companies. The company shares have a value backed by physical assets such as land, buildings, machinery, and so on. On the other hand, Bitcoins are just entries in a ledger. You cannot touch or feel them.
- There is an upper cap on the creation of the Bitcoins. There are chances of the value increasing once you reach the cap. At the same time, the converse can also be true. You will not have any forum for redress of your grievances.
Before making a decision, whether Bitcoins are a good option for investment or not, you should look at the above aspects. However, this is a revolutionary concept in every way. You have to take a calculated risk as the market is still in its infancy.