If you’ve been listening to the news recently, you’ll undoubtedly have heard brief whispering about the price of “Bitcoin” in comparison to the USD shooting up to around $7,000 per “coin”.
Whilst this might seem like a new craze, there are many fundamental ideas at work – many of which are NOT financial. If you want to “trade” Bitcoin to make a profit, there are a number of things you need to appreciate in 2017 (as the market & landscape have changed markedly).
This tutorial is NOT a recommendation to buy, nor is it financial or legal information pertaining to the Bitcoin asset class. The article is provided for educational and information purposes ONLY and should only be used in conjunction with PROFESSIONAL advice. With that said, let’s jump in…
What Is Bitcoin & Why Is It So Popular?
To answer the second question first… Bitcoin isn’t popular. At least not with “ordinary” people (yet). The main popularity Bitcoin has received has come from the “investment” community who have latched onto it as a commodity to trade, even Business Insider thinks so.
Indeed, the main reason why the price of the “asset” has shot up so sharply is due to the large number of “traders” who are buying and reselling it on the secondary market. A market, by the way, which is neither regulated nor official.
The main concern with “Bitcoin” presently is that it’s completely unregulated. Whilst this is by design, the reality is that if you are looking to start trading it, you need to appreciate the risks involved… and this is a MAJOR one.
Trading equities and other securities are backed by governments, banks and trading institutions. Many of these establishments are part of a wider consortium whom provide assurances to traders, investors & savers through such things as compensation schemes and regulatory bodies.
Whilst these have received negative press in recent years, the underlying reality is that if you are scammed by an institution covered by official regulators, you will be pretty secure in having some sort of way to gain reprieve. This is not the case with Bitcoin. If you lose money on Bitcoin today, there is nobody else to blame and no-one to help you recover any missing/stolen funds. As such, you need to read the next parts of the article very carefully.
Bitcoin was designed off the back of a technology called “Blockchain”. This is a type of data storage technology whereby pieces of data are stored in “blocks”, with each block being stored along a large “chain”.
The premise of “blockchain” was to create a decentralized way to store and maintain data. This would mean that databases would no longer need to be on a central server, but could be kept on 100’s or even 1,000’s of servers around the world. This would not only negate the need for a single central data provider, but (more importantly) make data “3D” in that it would be continually updated on every “node” (computer) it was stored.
What this means for end users is actually quite simple – data versioning… or in other words – the ability to maintain data in such a way that your system ALWAYS has the latest version of it stored.
In terms of how this translates into a “currency”… it works like this…
A “currency” is basically a form of transacting “value” between two or more parties. Back in the early iron age, this came in the form of gold, silver and bronze coins swapped for commodities and products. As civilization developed, these coins moved into less precious metals and eventually into paper. At the dawn of the 21st century, most currency transactions were handled digitally with banks moving $trillions daily, 99% of that being through computer systems. Insane that bitcoin hit over $10,000 – find out more.
The proposal for Bitcoin was to replicate what banks did (IE to record transactions) but using the decentralized nature of the “blockchain”. This would be secured through a special algorithm which only had 21 million permutations… thus limiting the currency’s total number and hence providing a stable “value” for it. This is the basis on which the current “Bitcoin” craze has been built.
How Is Bitcoin “Traded”?
Like any other commodity, Bitcoin is “traded” by people buying it for one price and selling it for another (hopefully higher) price. Whilst standardized commodities (such as stocks) have had central exchanges created solely for their trading, Bitcoin has a similar ideal but hosted through the Internet.
As mentioned, because Bitcoins are basically a “file”, there is no need for a physical transaction to take place. People who “own” encrypted Bitcoin files (known as “hashes”) keep them in “wallets” which are able to describe the various details of the Bitcoin’s transaction. These wallets, again, are entirely digital and kept on a web server somewhere.
The way you protect your encrypted Bitcoin files is with what’s known as a “private key”. This is for all intents and purposes a password used to gain access to the contents of the Bitcoin files. This password is personal to the owner of the Bitcoin file and can be changed.
The way in which “trading” Bitcoins works is to basically go through a large “cryptocurrency” exchange. The most popular today is one called CoinBase which is by far the most popular and respected. With over 12m users, it has provided for well over $40bn worth of Bitcoin trades. There are others, but CoinBase is the most popular to be honest. Learn how to trade Btc in Canada here.
If you sign up to an exchange, you will be asked to verify your identity (to prevent fraud) and will then be prompted to “deposit” any Bitcoin you want to sell into their system.
Remember… because Bitcoins are just files, this is basically a case of uploading the Bitcoin files to your new exchange account. Once inside, you’re able to offer them on the open market for sale. The exchange will basically take over the rest of the process, allowing you to release your coins if they sell.
If you wish to buy Bitcoins, the method works similarly. You basically have to acquire a Bitcoin “wallet” and then join an online exchange where you’ll be able to purchase a certain amount of Bitcoin for a particular price. Obviously, the price you buy it for and the amount you purchase will determine whether you’re able to turn a profit when it comes time to sell.
Is It Worth It?
In terms of making a profit in 2017, we’d say no.
The problem you have with Bitcoin is that its intrinsic value is so far below what the market thinks it is, meaning that it’s basically overpriced right now. The intrinsic value of Bitcoin is the “public ledger” that cannot be tampered with, regulated or duplicated. This ledger of transactions – in our opinion – is ONLY valid for certain situations.
The main benefit of it is the ability to transact money directly with people overseas. For example, if I got to the US and buy a car – I can transfer GBP into Bitcoin in the UK, travel with the BTC stored on my phone and then either send the BTC to the seller, or just exchange it to USD on the sell side. From a business perspective, this can be facilitated with small exchange fees in both countries. That’s fine, and would lend itself to being an openly traded commodity.
Another benefit (in a similar vein) is to have “smart contracts”. Whilst this is mainly the realm of Ethereum, Bitcoin could also provide people with the ability to “sell” their services, and receive payment the moment the service is completed. Even a heist can’t stop the rise of cryptocurrencies like Bitcoin.
The problem most people have is they presume to think that Bitcoin is some sort of replacement for fiat currency. You’ll see it a lot – “cashless society”, “digital currency” etc.
The issue with this – and this sits at the core of the current debate – is whether “Bitcoins” themselves actually store value at all. If they don’t, it means the entire premise that they’re worth $7,000 is false. If they do, we should be seeing Bitcoin-centric services & payment infrastructures, which is just not happening. Learn more with this post on Huff Post.
Thus, the question of whether trading Bitcoin is “worth it” comes down to a guess as to whether it will hold its price. Forget about the price rising… the major problem would be for it to bottom out.
The way we see it moving forward is that there will be a moment where people collectively decide on whether the premise of Bitcoin is actually worth the money they’re putting into it. We believe there will be a point when either we’ll start to see more digital services built on top of the likes of Bitcoin or Ethereum, OR we’ll see a major readjustment in their prices.
If a readjustment happens, most people will lose money because they’ll have overpaid for their Bitcoins. This is the risk of trading cryptocurrencies in 2017.
Should You Trade It?
Our opinion is that you should NOT trade Bitcoin in 2017.
With talk of constant “profits” (from resale), there is VERY little by way of intrinsic value for the coins. Whilst the idea of a decentralized digital currency is very useful, this does not necessarily mean that it’s going to be a profitable commodity to trade.
The problem you have is when “everybody” is talking about unlimited profits (100%+ growth per month), something is wrong. We expect a market adjustment in the first half of 2018 with many of the prices for the various cryptocurrencies coming down to more reasonable levels. Because of this reason, we we would not put any money into it right now.