Bitcoin – to invest or not?

Kirsten Doyle

By Kirsten Doyle

For several years, Bitcoin has been hailed as the next best thing in foreign exchange markets and a monetary evolution in our ever digital world. It has outperformed pretty much every major foreign-exchange trade, stock index and commodity contract – even gold. But how safe is it, and is it everything it’s cracked up to be?

How it works

Created in 2009, Bitcoin is a worldwide cryptocurrency and digital payment system that uses decentralised technology to make secure payments and for storing money. Transactions are made with no middle man, meaning no banks, and no transaction fees. It also claims to be totally anonymous, as there is no need to give your real name.

To get started with Bitcoin, you need to install a Bitcoin wallet on your PC or smartphone. This will generate a Bitcoin address, and you can create more addresses as needed. If you want to get paid, you disclose your address and vice versa.

The Bitcoin network relies on block chain technology, essentially a shared public ledger, that includes all transactions.  It can be described as a constantly growing list of records or ‘blocks’ that are linked and secured with cryptography. Their appeal is their security as they are inherently resistant to any change in the data, it cannot be altered retroactively. This allows Bitcoin wallets to calculate their spendable balance, and to verify new transactions.

All transactions, or transfer of value between wallets is included in the block chain. The wallets keep a secret private key or ‘seed’ which is used to sign transactions, and serve as proof that they are from the wallet’s owner. Transactions are broadcast and confirmed in a process called mining, a distributed consensus system that enforces a chronological order in the block chain, and protects the neutrality of the network, preventing any individual from adding new blocks consecutively in the block chain.

Obvious appeal

Bitcoin’s soaring value and well-documented investor performance are tempting many people to invest in the digital currency. It also appeals to a wide variety of people for various reasons – it offers a currency that isn’t controlled by any bank, and can be spent with ease across borders with little regulation or limitation.

For many, the most compelling reason to invest in Bitcoin is its low cost, high speed and complete freedom when it comes to transactions. Sending money around the world takes a maximum of ten minutes, the only charge is what is levied by the exchange in question, and transactions can be any amount. The cost of transferring money becomes significantly cheaper and faster than other methods.

Real value?

But, and it’s a big but – Bitcoin isn’t backed by anything and it has no intrinsic value. It smacks of a pyramid scheme, based on a willingness to assign a value to something that has little or none beyond what individuals are willing to pay for it. And while cryptocurrencies are currently free from regulation, should they grow in popularity to a point where they start competing with traditional currencies, you can bet that they will be banned or regulated pretty quickly. There is just no real substance or power behind this currency to guarantee its viability in the long term.

Bitcoin is also deflationary, meaning that the number mined coins are finite, 21 million to be precise. Once 21 million Bitcoins have been mined, that will be the total number that will ever exist. Moreover, as there are numerous lost or forgotten wallets, the number of active Bitcoins will be lower, with no way of accurately assessing the number. They can be lost due to the death of a Bitcoin owner, or an irrecoverable password, or simply forgotten wallets from when Bitcoin was worth, relatively speaking, peanuts. And it’s close to impossible to recover lost coins.

A favourite among thieves

Bitcoin’s value has soared, there’s no doubt, but it remains highly volatile, and is plagued by associations with malfeasance and illegal activities. Bitcoin users aren’t immune from theft and scams either, in fact it’s lack of regulation may even facilitate this. Malware targeted cryptocurrency users is growing in popularity and sophistication too, being directed at bitcoin exchanges.

By it’s nature, fraud prevention becomes extremely difficult, and there is absolutely no way to get Bitcoin back once it has been stolen. It has also become the preferred method of payment for ransomware authors to monetise their efforts, and is used for the sale of illegal narcotics on the dark Web – it’s anonymity makes it a favourite among criminals.

So, think before investing in Bitcoin. Sure, there are tremendous opportunities, but massive risks too.