What is Bitcoin?

Should I invest in Bitcoin?

What exactly is Bitcoin?

Bitcoin is a crypto currency, which was invented by Satoshi Nakamoto in 2008 and started operating in 2009.

Bitcoin is a peer-to-peer electronic cash system which operates freely over the internet.

Electronic money stored in electronic vaults

Bitcoins are digital currency stored in digital vaults

The bitcoins are representative of electronic money, and are stored in electronic vaults.

You can buy assets or trade with other Bitcoin users who will electronically remit payment to your personal vault, which is known as a “digital wallet”.

Transactions verified by “miners”

Bitcoin miners verify transactions

The crypto currency trade is facilitated on line using decentralised databases, with “miners” doing the work of validating transactions from one Bitcoin account to another.

According to Wikipedia, as at 7 January 2018, there are 1,384 different cryptocurrencies available to buy.

Bitcoin, being the first, is also the largest.

At the end of 2017, the market capitalisation of Bitcoin was estimated to be $243.4 billion US dollars (source: Wikipedia).

Not controlled by banks or governments

Bitcoin and other crypto currencies have changed the way that money can be used.

They have an operating system which is not controlled by any bank or any Government.

This means that there are no controls on the movement of money through the world wide banking system (with the current exclusion of China, where trading is currently banned).

No owner verification required

Crypto currency accounts also do not require any verification of who the owner of the account is.

This can allow large amounts of money to move around the Bitcoin system without there being any identification of whether the owner is a criminal or a person of interest in the traditional banking system.

There is a lot of anecdotal evidence to support the fact that terrorists, hackers, gangs and illegal business activities are moving large amounts of money around in crypto currencies.

The block chain system means that the transactions are all stored in historical sequence.  The system does not allow for transactions to be reversed.

Bitcoin trading since 2009

Bitcoin has been trading since 2009.

In 2011, the price of a single bitcoin went from $0.32 US to $32 before ending up back at $2.

In 2013, there was a spike in the purchases of bitcoin with the price rising to $266 US per bitcoin before it dropped back to $50 mid year.  However, in November 2013, it rose to $1,242 but was then back down at $600 by August 2014.

In 2015, it hit a low of $244 and didn’t move for quite a period of time.

It crept up through 2016  and in March 2017, it hit a new record of $1,268 per bitcoin.

From there, the growth in value was exponential through to August 2017 ($4,764) where it hovered until October.

As of December 2017, the price of bitcoin was $13,889 per unit.  As of 22 January, it is trading at $11,434 US.

Some governments attempting to ban crypto currency acquisition

There have been some serious attempts by the Chinese Government and the South Korean Government to stop their citizens accessing crypto currency purchasing websites and digital wallet websites.

They are concerned about money laundering and speculative trading.

The use of crypto currencies in China has now been banned.

Japan is also looking at introducing some measures to curtail the access to crypto currencies.

As a result of these announcements, the price of bitcoin has fallen by 20% in the last 2 weeks.

The value of many of the other crypto currencies has fallen even further.

Would I recommend Bitcoin as an investment?

No.  It is incredibly volatile in price.

You could double your value or lose the whole lot in a matter of hours.

It is expensive to hold and trade.

There are a lot of costs involved in holding a digital wallet, and also in getting miners to validate your transactions.

Large global companies like PayPal and Microsoft will allow you to pay in Bitcoin but they charge a surcharge of up to 2% to pay in Bitcoin.

Digital wallets are reasonably secure but have the potential to be hacked.

You need to manage your digital security very carefully.

There is also a wide spread between the price at which you buy Bitcoin and the price as which you sell Bitcoin.

At present, the spread is $98 per bitcoin.  This pays for the costs of the miners.

Speculative venture

It is a speculative venture.

By all means, have a go if you want to, but only put in money that you can afford to lose.

Have a system of profit taking to make sure that you pull funds out to cover your initial costs as soon as you can.


Janet Natta is a financial adviser and director of Smart Money Advice, offering investment portfolio construction and management services to clients throughout NZ, as well as comprehensive financial planning advice to assist clients to build and protect wealth to achieve their dreams.
DISCLAIMER: The information contained in this article represents the views of the author. It is based on information believed but not warranted to be correct.   Any views or information, whilst given in good faith, are given with an express disclaimer of responsibility and no right shall rise against any of the authors or Smart Money Advice or their employees either directly or indirectly out of any views, advice or information.