After the 2008/9 financial crisis, the public confidence in government regulators was at a historic low. The public felt betrayed by the regulators who were created to protect them. In the aftermath of the crisis, a person going by the name of Satoshi Nakamoto created Bitcoin, as a decentralized digital currency with no single regulator.
At the same time, Ross Ulbright was creating Silk Road, a digital marketplace where people would trade in everything. The main challenge with his company was that it used the US dollars, which could be traced by law enforcement officers. As such, since Bitcoin could not be tracked, it became the default currency used in Silk Road.
As Silk Road became more popular, the concept of Bitcoin started to attract more attention. This attention led to its price to start rising. It also led to the creation of more copycat digital currencies like Ethereum, Ripple, and Litecoin. Today, there are more than 2000 digital currencies.
At its peak in December 2017, the price of Bitcoin reached almost $20,000 and the entire market capitalization of cryptocurrencies was more than $800 billion. Since then, the price of Bitcoin has declined to about $3500 at its lowest point, and the market cap of the digital currencies has declined to $172 billion.
How to Invest in Bitcoin
While the confidence in the cryptocurrencies industry has waned over the recent years, it is still possible for you to invest in the industry. Most people who invest in Bitcoin, buy them from exchanges such as Coinbase and keep your bitcoins stored in secure hardware wallets such as Trezor. The key here is to HODL. Note, if you don't have the financial means to buy one or more bitcoins, you can always buy a part of a bitcoin. These portions are also called Satoshis.
Buying real bitcoins
If you believe that the price of Bitcoin will ultimately recover, you can buy the Bitcoins from the leading brokers. In the United States, the biggest cryptocurrencies exchange is Coinbase, which has recently been valued at more than $8 billion. Other US-based exchanges you can use are Bittrex, Kraken, and Gemini among others.
The exchange you use is important because of the risky nature of the industry. Ideally, it should hold most of the currencies it holds online, with the rest being in the so-called cold storage. In addition, the exchange should be insured, which will help you recover your funds in case of a security breach. A few months ago, customers of QuandrigaCx lost their funds when the founder of the company died. He was the only one with the company’s password and the exchange was not insured.
Buy CME Futures
In 2017, Chicago Mercantile Exchange (CME) launched Bitcoin futures. This happened a few weeks after its competitor, CBOE launched a similar product. While the futures offered by CBOE are no longer available, it is possible for you to invest in those offered by CME. The benefit of trading these futures is that a physical wallet is not needed because the transactions are financially settled. Another benefit is that you can short the futures, which allows you to benefit when the price declines. You can also trade these futures using companies like Interactive Brokers.
Robinhood is an online broker that allows traders to transact without any commissions. The company is preparing to launch its IPO, which will value it at more than $5.6 billion. In 2017, the company started offering a product that allows you to invest in Bitcoin.
Another way you can invest in Bitcoins in the US is by mining them. This process involves the purchase of hardware that will do the complex mathematical calculations that produce Bitcoins. The challenge with mining in the US is the cost of electricity. This has pushed the cost of mining a single Bitcoin to almost $5000, which makes it a bit unprofitable for now.
Finally, you can invest in companies that are closely associated with Bitcoins. For example, a company like Nvidia, which is listed in Nasdaq offers chips that are used in the Bitcoin mining. The same is true with a company like Overstock that has transitioned itself to be a Bitcoin company.
What is the Future of Bitcoin?
PayPal had these goals of creating a new currency. We failed at that, and we just created a new payment system. I think Bitcoin has succeeded on the level of a new currency, but the payment system is somewhat lacking. It’s very hard to use, and that’s the big challenge on the Bitcoin side.” –Peter Thiel, Co-Founder of PayPal
Bitcoin is still a controversial ‘asset’, with supporters and critics on both sides. Supporters argue that it is the currency of the future. Some have argued that its price could reach more than $1 million. Critics on the other hand have argued that Bitcoin is worth zero.
At present, it is difficult to see the future of Bitcoin for a number of reasons. First, more than ten years after its launch, no significant retailer accepts the currency. Those who used to accept them initially like Microsoft have stopped doing so because of their volatility. Therefore, it is almost impossible for a currency to do well when no retailer accepts it.
Second, the competition in the cryptocurrencies industry is enormous. Today, there are more than 2,500 currencies. There are also stablecoins that are backed by real assets like gold and US dollar. Also, Bitcoin can easily be diluted through the forking process. Forking leads to the creation of a new currency.
Third, the role of Bitcoin as a digital gold does not make a lot of sense. This is because in case of an armageddon, Bitcoin would be the last asset you would want to own. In fact, rather than being a safe haven, Bitcoin’s volatility has made it a risk asset.
Fourth, the volumes of Bitcoin transactions have decreased significantly. This was the main reason why CBOE stopped offering its futures in the first place. Part of the reason is that Bitcoin does not serve as an anonymous means of exchange because transactions can be tracked online.
Fifth, Bitcoin does not serve any of the four main functions of money. These functions are store of value, medium of exchange, standard for deferred payments, and a measure of value.
Finally, the security of Bitcoin has made it difficult to own. In 2018 alone, cryptocurrencies worth more than $1.7 billion was stolen. It is therefore difficult to see how the currency will be accepted globally as a means of payment.