What is a Bitcoin and should I invest?!

Hi All,

There has been a lot of discussion about “Bitcoins” recently including some news broadcasts, and a lot of you may be confused as to what a Bitcoin actually is and whether it’s “dodgy”!

In simple terms, a Bitcoin(or BTC), is a global virtual currency and a couple of years ago, $15 would buy you 1 BTC. You could then keep that BTC, or use it to buy goods (virtual or physical) from any website that accepts BTC as a form of payment.

Bitcoins are found/created through a process called “mining”, which is where a very difficult mathematical equation is solved, requiring a HUGE amount of computing power! The technology behind the Bitcoin restricts the market to only ever having 21 million Bitcoins, but these aren’t expected to be all in trading until 2040….! Due to this it is free from political influence and inflation – It is one truly global private currency! Incredible!

The creator is unknown! This is a little scary – There is a pseudonym for the creator thus is thought to be a 30 something year old male from Japan (Satoshi Nakamoto). Due to the cryptography and encryption behind the Bitcoin, either he is an absolute genius, or it was actually a much larger scale operation.

To buy a Bitcoin is relatively simple. MTGox is the leading trader (bank transfer some money in, buy or sell BTC, that simple!). As I write this blog, the BTC is priced at around $85!

So why has the Bitcoin been in the news the past few days and what’s all this talk of a “Bitcoin bubble”? I mentioned before that a couple of years ago it was priced at $15. It raised up to $30, and a few weeks ago, an explosion happened. We saw something like this:

1) Value raised to $150

2) Value dropped to below $100

3) Value raised to $260

4) Value dropped to $120

5) Value raised to $200

6) Value dropped to $60

7) Value currently at $85 at time of writing

Graph for BTC Value
Graph for BTC Value from http://bitcoinity.org

Most of this actually happened in the past 2 days (3 to 7). Many people invested heavily at around the $50 mark, and sold at $260 making over $200 for each Bitcoin! But why the big drops and rises? The market is influenced by only one thing – PEOPLE!

That means, if there’s a news article saying it may crash, and everyone goes on to sell, the value of the BTC drops substantially. To make matters worse, MTGox, the leading trader, has been regularly down due to being overloaded with requests! In fact, on the 11th of April it suspended ALL trades to help normalise the currency. Whatever their reason was, it meant people could not sell their Bitcoins if they had them stored with MTGox. This meant, as the price dropped, investors could simply watch their account shrink and do nothing about it…! On the plus side, if you buy when it’s low and it shoots up, happy days!

You’ll now be thinking to yourself “Should I invest?”. There are many teccies saying “YES INVEST” and many non teccies saying “NO DON’T INVEST”. I actually have a mixed view. The dangers are:

1) No one knows who created it which is a little concerning, but does this affect the value of it? Probably not

2) It can be hacked (someone could potentially hack your account and steal your bitcoins). This is true of ANY currency however, so I wouldn’t say this is a reason to avoid!

3) The traders can’t be trusted? Well, this one is maybe a better point. If you lose lots of money or a trader goes offline, do you have any legal rights? Maybe, maybe not. It’s said to be an illegal currency in the US, but it’s a very grey area.

What I would advise, is if you have money that you can lose without being upset, then invest, and invest big when the price is low again. I have money waiting in BitStamp (which remained online throughout the MTGox trading suspension), ready to take advantage if it crashes again. I’ve debated buying at $85 but due to the high’s and lows, I’m pretty content with waiting a week and seeing how things go. There’s a chance it will crash to 0 (forever), or as a few close friends have predicted, there’s a chance it could rise to $1000+ over the coming years…..

Whatever you do, it’s risky business but it could potentially be very profitable. From a technical standpoint, this “thing” is causing a stir to the world!

Tweet me @thejsug !

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