What do you understand about bitcoin?
Bitcoin is the first and largest of the so-called “crypto currencies” and the No. 1 buzzword of late. The reason for its popularity is its 1,403 percent increase in value during 2017, when it shot from $952 to $14,310. Until its 23 percent drop in the last two weeks of the year. Let’s get a little deeper into what’s going on here.
Bitcoin is built on a new network technology platform known as blockchain. Blockchain is a distributed database that holds transactional data recorded across many devices, in a manner that allows all parties of a transaction to access it and trust its history has not been altered. This is all done without an intermediary on a peer-to-peer basis. Blockchain technology can reduce transaction time and costs by eliminating intermediaries and increasing the integrity of critical data. Bitcoin, created in 2009, is a digital “crypto” currency that can be bought and sold online for other currencies around the world. Though it was the first application of this new blockchain technology, it is important to understand buying bitcoin is not buying blockchain technology; it has no underlying asset, value, nor guarantee. Bitcoin is a speculative currency that’s value is only driven by what the next buyer is willing to pay for it. If all parties wanted to cash out back to dollars or other hard currencies at this point, they would receive pennies on the dollar, if anything. Crypto currencies are the new alchemy.
While the future of crypto currency is uncertain, the technology underlying them has the potential to be transformational. Bitcoin is not blockchain. The value of blockchain will be derived by firms who can unlock its potential and innovate new applications for it. As for bitcoin, it is pure speculation. History can teach us a lesson if we look back to the fairly recent dot.com bubble, when internet stock prices soared to ridiculous levels with no justification for their valuations. They had little or no revenue, let alone profits, but they were the new buzz of the time, triggering the snowball effect of higher prices begetting higher prices by attracting buyers with the hopes of quick and easy profits. When a market reaches such exuberance, as it seems to have with the cryptos, it is time for the buyer to beware!