Should you Invest in Bitcoins?

This morning an interesting news item caught my attention.

 “If you had invested $100 in 2010 in Bitcoin, today you would have been a millionaire with more than $50 million in your account”

Alas! did I miss a golden opportunity?

Many of us may have the same question today.

So what is bitcoin?

Bitcoin is the most successful and popular decentralised crypto-currency till date; running on distributed digital ledger technology ‘blockchain’ in a peer-to-peer network. It came into existence in year 2009 when Satoshi Nakamoto created the bitcoin protocol and mined first bitcoins. Since then this digital currency has been gaining popularity and increasing in value against fiat currencies of the world.

Arguments in favour-

  •  Bitcoin supply is fixed: Bitcoin protocol keeps its supply in control. It releases a fixed number of bitcoin as rewards to miners who add a new block of bitcoin transactions to the blockchain in every ten minutes. The reward keeps reducing by half every 210,000 blocks which in normal course of time, occurs after every 4 years. Thus the protocol limits the total number of bitcoins to 21 million and this is expected to reach in 2140. Today there are about 15 million bitcoins in circulation. When Satoshi started bitcoin, the reward for creating a block was 50 bitcoin. Since then it has halved twice and currently it is 12.5 bitcoin a block.

Below chart shows bitcoin supply since inception

Source: www.blockchain.info

  • Bitcoin demand is increasing: In the very beginning, it was Satoshi and his team, mining and transacting in bitcoin. Today there are about 9 million wallets where people are storing their bitcoins or using them for transactions. With time, this will further increase resulting in higher demand for bitcoins.

Below chart shows number of wallet users across time

Source: www.blockchain.info

  • Value of bitcoin: Currently bitcoin is trading at roughly $580. In June 2009, one bitcoin was equal to 0.0001 $US. Demand for bitcoin is expected to increase manyfold in next couple of years, with more people entering into the network and increasing number of applications getting built on bitcoin protocol.

Below chart shows bitcoin price movement in past two years.

Source: www.blockchain.info

  • Network effect: Bitcoin has achieved a network effect with 9 million wallets dealing in it and new wallets entering into the bitcoin network everyday. Bitcoin started with computer geeks and slowly getting attention of not only common people as a store of value but also merchants as an alternative payment mechanism, which saves on credit card charges and increases profitability.
  • Increasing acceptance among merchants and organisations: Bitcoin will have value if people are willing to pay for it and businesses accept it as payment for goods and services. Some big companies like Microsoft and Dell have already started accepting bitcoins. Bitcoin ATMs are spreading globally with maximum number in USA and Canada where people can exchange bitcoins with local currency. These trends are expected to go on increasing in future.

Below chart shows trend in increasing number of transactions per block over past two years.

Source: www.blockchain.info

  • Bitcoin price prediction: According to Trace Mayer, if 1% of the cash balances from off shore tax haven bank accounts move into bitcoin; one bitcoin will touch 2.8 million USD. Today this seems highly unlikely. But then also a few years ago when bitcoin was sub US$1, it was difficult to imagine the value to touch US$ 500 one day. Bitcoin protocol is on an open platform where developers are building new applications like smart contracts, ways for cheaper remittance, banking services for unbanked people, micro-payments, crypto-equities and others. That is expected to further fuel up the demand leading to increase in value.

Arguments against bitcoins:

  • 1% of bitcoin community controls 99% of bitcoin: It is believed that Satoshi Nakamoto has one million bitcoins and similarly a few other early miners. in fact till late 2011, there were only couple of bitcoin wallets in the network controlling all the bitcoins mined till then. If these people decide to sell bitcoins in the market, expect the price to be highly volatile.

Below table shows bitcoin distribution

Source: www.crypptocoinsnews.com

  • Regulators may try to clampdown on bitcoin and that may result it losing lot on value. The below picture shows position that countries had taken on bitcoin in 2014. Though this has changed a lot since then; Russia and China have set up Blockchain committees to study its implications and applications.

And total clamp down seems a difficult task since there is no centralised authority that is managing bitcoin and can be shut down easily.

  • Technical issues: There are many issues which need consensus to get resolved like lower incentives to run nodes with time, higher transaction fees, small size of blocks, low number of transactions per second etc. Bitcoin network handles about 7 transactions per second whereas Visa, Mastercard can handle that in thousands.

Considering the risks, if you would still like to invest in bitcoin, do so based on your risk appetite. And learn more about it, If you are new to this. Currently it is a high risk investment therefore only invest an amount that you are willing to lose. You can invest serious money, once there is higher acceptance of bitcoin globally and system attains greater maturity.

And for those who want to store their bitcoin offline learn to create a paper wallet.

Photo courtesy Skitterphoto