Tuesday, December 12, 2017

BITCOIN, What is it, and what I expect from it

We have heard a lot about bitcoin, but what is it?.

Bitcoin is a cryptocurrency, a digital currency that uses cryptography to secure transactions and create additional units of said currency, a process called mining. It was created anonymously by someone under the pseudonym Satoshi Nakamoto in 2009, and offered open source, meaning with the full code open for everyone to see.

The key element of bitcoin is the blockchain: the blockchain is a distributed and public ledger that tracks who owns what, and the history of previous transactions, although ownership is not linked to real-life identities, but to digital addresses.
The blockchain is composed of blocks, which are a set of bitcoin transactions that took place within a particular period of time, and are stacked so newer ones depend on the previous block.
Adding new transaction records and thus blocks to the blockchain is done by mining, which in practical terms involves solving very complex equations with powerful computers, a costly process in electricity and equipment.
This expensive effort rewards the miner that discovers the block, but also offers a small comission for confirming those transactions in a trustful manner, keeping the network secure. This is a business for many people around the world, in particular in areas with low electricity costs.
There is a limit of how many bitcoins can be mined, about 21 million, of which 12 have already been mined; since new bitcoins can be mined only at a set, diminishing rate, we know the last bitcoins will be mined around 2140.

Some of the advantages of bitcoin:
-It works all around the world, 24/7.
-No taxes since third parties can't intercept bitcoin transactions,
-Almost no transaction costs, since merely by using bitcoins the user shares the burden of the network by authorizing transactions.
-Cannot be stolen without access to the owners computer, since changing the  ownership address can only be done by the owner.
-Cannot charge-back bitcoins, once bitcoins are sent, the transaction can't be reversed, though this also means errors are costly.
-While third parties have access to traditional financial data, this is not possible with bitcoin unless the owner voluntarily publicizes their address wallet.
-With multiple copies of the transactions database, noone can seize another user's bitcoins, not even governments.
Some of the disadvantages of bitcoin:
-If you lose the private key to your bitcoins, they are gone, noone can recover them ever.
-Very volatile price, the price can change wildly from one day to the next.
-Completely unregulated market, meaning many questionable practices that are forbidden or illegal in other markets, are suspected to be happening in some cryptocurrency markets, such as placing spoof orders or buying their own sells.
-Crypto-currency exchanges have been hacked in the past, while it is not the fault of the Bitcoin, the same way as a bank being robbed is not the fault of the euro or dollar, in the case of bitcoin being robbed, recovering the money is almost impossible.
-Bitcoin is used by mostly honest people, but it is also a refuge of choice for criminal transactions and even nations under international sanctions, so I think there is a risk nations and banks may try to limit the trading of it in the future, which would sink its value overnight.
-It competes with traditional currencies, so it upsets the status quo of very powerful nations and organizations. This means it has extremely powerful enemies, so putting my money in it makes me very nervous.

Personally, I have no idea how the bitcoin price will evolve, maybe it will be worth 1 million dollars each, or we are in a huge bubble set to pop, or governments go against it and it ends up being worth only 2 cents, as such, I don't think I'll be trading my euros for bitcoins. I only invest in what I understand, and I don't understand what justifies its massive increase in price.
Anyway, the cryptocurrencies are still developing, many things will be changing in the coming years and decades.
As always, remember this is only my opinion, I don't offer advice, you need to choose what to do with your own money.
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As always, best of luck in your investments.

1 comment:

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