Bitcoin (ticker: BTC) has been around since late 2008 but it only started making the news in early 2013. It is a crypto currency and a payment system; its main advantage being that transactions are anonymous and peer-to-peer (i.e. made directly without an intermediary). Bitcoin’s unique architecture is set-up in such a way that their creation (or “mining”) gets progressively more resource-intensive and total production will be limited to 21 million Bitcoins.
It’s certainly an interesting concept with many advantages but also some important disadvantages. For example:
Given its pseudonymous nature and that Bitcoin address owners are not explicitly identified, such transactions are effectively anonymous. However, this anonymity has been known to attract transactions from illegal activities, the best-known example being that of the Silk Road website. This has been a problem with regulators and officials, as they recognise it as a medium for illegal transactions.
Bitcoin has been recognised as currency in many countries and as of today it’s the most liquid & widely accepted crypto currency in the world. However, there is a long list of alternate crypto currencies that are eager to grab market share and challenge Bitcoin’s dominance. And what about the 21 million Bitcoin limit? It’s possible that once that ceiling becomes severely limiting, users will turn to other crypto currencies, effectively increasing the global supply.
Bitcoin trades continuously on exchanges around the world in a very quick and straightforward manner, and it is conveniently stored electronically in “wallets”. However, having online wallet providers introduces an extra risk factor that cannot be ignored. One such example is the security breach at Mt. Gox in 2011, which sent shockwaves in the crypto currency community. At the time, Mt. Gox was handling around 70% of all Bitcoin transactions and one day it declared that around 850,000 Bitcoins had been stolen. Soon after the exchange suspended trading and filed for bankruptcy. It’s this potential security vulnerability that makes many people sceptical when it comes to crypto currencies.