Bitcoins are a relatively new form of digital currency that may herald a drastic overhaul of the world’s financial ecosystem. It is stored electronically and can be bought and traded online. Because bitcoins are traded solely online, there is a drastic reduction in transaction costs compared to traditional currencies. The encryption and the heavily distributed, open source nature of the Bitcoin system offer a high degree of security. Combined, these characteristics make Bitcoin a seriously disruptive financial instrument.
Bitcoins are increasingly being accepted by a large number of online businesses and real world retail stores, like TigerDirect, Overstock and Home Depot. In the near future, large online retailers like Amazon.com are also expected to join suit. “We’re going to have to integrate digital currencies in our wallet,” Donahoe, the CEO of eBay, was quoted as saying in an interview. Banks are also being increasingly convinced to accept the new currency. The wide acceptance of Bitcoin signals a rising investor as well as general confidence in the digital currency.
LinkedIn co-founder, early Facebook investor and Greylock Partners partner Reid Hoffman has declared his enthusiasm for Bitcoin as part of his 5 year investment strategy, in an interview with CNBC’s ‘Squawk Alley’.
Prominent investors and financial experts are backing the digital currency. The Co-Founder of LinkedIn, Reid Hoffman, is also a proponent of the system and claims that he is increasingly focusing on bitcoins as part of his 5 year investment strategy, “I think it’s an incredible system that’s created a ledger that is across – a distributed ledger across the whole world – for it can be money but it can also be other things.“
Bitcoin is a deregulated currency – no centralized bank or government creates or controls it, though government policy does impact it to a certain degree. The lack of a central regulatory body is both an advantage and a disadvantage. A regular fiat currency like the U.S. dollar is, for example, backed by the government. Essentially, the government is legally bound to guarantee the value of the currency it recognizes as “money”. Government policy thus, as a result, drastically impacts the valuation of the fiat currency. Bitcoin, on the other hand, is not backed by any government or private institution. Its value is solely based on supply and demand. Unlike gold, which was the standard currency in the past, bitcoins don’t carry any inherent value in themselves.
A single Bitcoin that cost $0.08 in 2008 peaked at close to $1200 in 2013 – that’s 15000x in just 5 years.
Still, the value of a single Bitcoin has been rising rapidly since the currency was introduced in 2008. A single Bitcoin that cost $0.08 in 2008 peaked at close to $1200 in 2013, and is now somewhat stable at around $600. Many early investors are now millionaires, despite the general fluctuation in bitcoin prices. Some fortunate individuals have had an unwitting windfall. A Norwegian man, Kristoffer Koch, bought $27 worth of bitcoins in 2009 and forgot about them for four years. The wide media coverage Bitcoin began generating in 2013 jogged his memory and he discovered that his $27 worth of bitcoins were now worth $886,000.
Volatility and other issues aside, the meteoric rise in the value of bitcoins cannot be ignored. Like any other new financial product, it has its own set of inherent risks. However, it would be wise to step in and evaluate whether bitcoins should be part of your investment portfolio. It’s not for the faint hearted. But for those who have a bit of a risk appetite and are willing to make an informed gamble, bitcoins are definitely an option worth serious consideration. After all, the promise of such high returns doesn’t present itself every day.