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Bitcoin – Investment Goldmine or Risky Business?
No less than a couple of years ago, few people had even heard of Bitcoin, let alone been able to predict its meteoric rise in value. Its recent surge has prompted many to jump on the Bitcoin bandwagon and invest their hard earned money into the cryptocurrency. On one hand, the rising value of Bitcoin puts forth an opportunity for people to seemingly make thousands within a very short space of time; but the flipside is the volatility and lack of solid foundation behind Bitcoin, making it an incredibly unpredictable and risky commodity.
What is Bitcoin?
To understand the nature of Bitcoin, we should first get a grip on what Bitcoin is. As a simple definition, Bitcoin is a type of digital currency created in 2009, and operates on a public cloud-based ledger. This is highly encrypted and serves to remove the need for a centralised banking system, rapidly increasing the speed at which financial transactions around the world can be made, and made anonymously. Hence has been very popular currency in the black market and organised crime. Over time, some retailers and customers alike have embraced the use of Bitcoin as a way of buying and selling goods and services, although this has been very limited to this point in time.
Risks associated with Bitcoin
There are considerable risks to consider when looking at Bitcoin or other digital currencies as an investment. It is unregulated – we don’t even know who invented Bitcoin, and it is unlikely if it did gain traction as a genuine alternative currency that government reserve banks would sit back and not take some form of action. And it’s price has gone up astronomically over the past 12 months with all indications it is a speculative bubble beyond what we have ever seen before (even the Tulip bubble of the 1630’s).
Another very real risk with Bitcoin is that vendors can potentially be struck down by cybercrime. Four years ago, cybercriminals hit Mt. Gox, which at the time was handling around 70% of Bitcoin’s trading volume. The hackers took 850,000 Bitcoin, which at today’s value would sit at around AUD$13 billion. In the two years after the attack, Bitcoin ended up losing more than 80% of its value. In today’s Bitcoin Market, Bitfinex takes care of around half of the Bitcoin trading activity, and a similar attack would have a devastating effect on the value of the cryptocurrency, significantly more so than what happened after the Mt. Gox theft.
The chance for Bitcoin to crash hard is very real indeed. There is no question the technology sitting behind digital currency (blockchain) will and already is transforming financial markets, but unlikely that Bitcoin will be the new world currency of exchange.
For further advice on investment and managing your wealth, get in touch with the team at McKinley Plowman on 9301 2200 or at www.mckinleyplowman.com.au.
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