In the first part of this series, we introduced you to databases and specifically the blockchain. Bitcoin was introduced as a cryptocurrency in the illustration of the application of blockchain technology. We gave you some clear insights into the definitions of money, in all its different forms.
Please read here in case you missed the previous edition. https://www.regenesys.net/reginsights/block-chain-explained-part-1
We continue now in Part 2 with a discussion on the value of bitcoin.
WHAT GIVES BITCOIN (CRYPTOCURRENCIES) VALUE?
When considering whether Bitcoin is a worthwhile investment or not, we shall first explain what causes cryptocurrencies to have value.
The value of currencies firstly lies in their use as a store of value. It is reasonably certain that they will maintain their value over time and is expected not to depreciate significantly. Currencies are further used as a unit of exchange. Whereas in the olden days, commodities were carried around, the introduction of digital money and now cryptocurrencies, makes it much easier to transact. For currencies to be considered successful, they have six unique characteristics.
We will now apply these characteristics to Bitcoin, as a currency:
- Scarcity: Managing the supply
With the launch of Bitcoin in 2009, the protocol stipulated that the supply would be capped at 21 million. Assuming the protocol is unchanged, this scarcity causes the value to increase.
- Divisibility: They are flexible and may be divided into smaller units
Bitcoin can be divided into 8 decimal points.
- Utility: Units of currency should be easy to trade for goods or services and may be moved easily
Blockchain technology enables Bitcoin to be moved easily and there are today many goods and services providers readily accepting Bitcoin as a form of payment.
- Transportability: The currency should be easily exchanged between the parties inside a country as well as cross-border
Cryptocurrency exchanges (such as Luno in SA) and wallets offered, allows Bitcoin to be transferred between parties in a couple of minutes.
- Durability: Currencies should be manufactured in such a way that they will maintain their form and substance.
Bitcoin cannot be lost due to physical damage. An owner may lose its cryptographic key, rendering the Bitcoin unusable and the panellists warn that users should safeguard their security keys against loss of this nature.
- Counterfeit-ability: If difficult to counterfeit, currencies should not be negatively impacted by fake units being circulated
The blockchain ledger system makes it incredibly difficult to counterfeit Bitcoin. Due to the vast number of users of the blockchain counterfeiting is almost impossible.
Read more on this topic at https://www.investopedia.com/ask/answers/100314/why-do-bitcoins-have-value.asp.
SHOULD I BUY BITCOIN?
Bitcoin may be considered a valuable currency. We return to our panellists to express their views on whether Bitcoin in itself is a good investment.
The answer is: Yes!, but not for purposes of investment. The real reason behind buying Bitcoin should be exploring the technology and the skills to be acquired in doing so. Being part of this (relatively) new technology is downright amazing!
If you wish to invest, remember that cryptocurrencies aren’t a get rich, quick scheme. It is a highly volatile environment, as was seen when Elon Musk of Tesla, announced that Tesla will no longer accept Bitcoin as payment, and the value of Bitcoin fell. (https://www.moneyweb.co.za/in-depth/revix/how-much-of-bitcoins-price-dive-is-elon-musks-doing/).
Sound financial advice is therefore to never put all your eggs in one basket and to diversify your portfolio of investment products.
Institutional investors have also not yet concerned themselves with investments in this space. Readers are encouraged to download the App from Luno (https://www.luno.com/en/za) and play with it, open an account, buy some cryptos and be part of this revolutionary technology. The experience of exploring this technology is considered more valuable than just merely the investment itself.
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Join us in our next edition when we explore the forthcoming Regulations and the Central Banks’ involvement with cryptocurrencies.
