Bitcoin For Dummies

What is Bitcoin? Trying to read Wikipedia’s entry for Bitcoin will put you in a permanent state of confusion. Here’s the elevator answer to the question:

Bitcoin is a digital asset, that is, its existence is in the form of digital code. There is no physical specie. It is designed as an alternative for government issue money, serving as a unit of account, a medium of exchange, and a store of value.

Acquiring the stuff is complicated, but not impossible. Wikipedia estimates that there are over 5 million users/owners of Bitcoin, and several hundred thousand users of other cryptocurrencies (the generic term for the instrument). But the interest in these things  is  growing so rapidly that any number applied to owners  is going to be dated as soon  as it is cited.

How well does Bitcoin work as money? As a unit of account, perfectly. One Bitcoin has one million bits. As a medium of exchange? Over 100,000 businesses accept Bitcoins for goods and services. You can pay for pizza with Bitcoins at Papa John’s. As a store of value? Ah, there’s the rub.

The potential for Bitcoin to be a store of value lies in its scarcity. Only 21 million Bitcoins will ever be issued, so, as long as there is interest in owning cryptocurrencies, an owner can be assured that the coins will not be debased by more printing. However, whether it works for you depends on what you pay for it, and what it is worth when you want to sell it or use it to pay for something.

If you stick three thousand dollars in a bank account, intending to use it to pay for the rent on a vacation condo this summer, you don’t doubt that, come July, you’ll have three grand to give the B2B owner. But if you are holding Bitcoins for the purpose, you have no earthly idea how many  you’ll have to fork over for the transaction. Take a look at the history of price changes, expressed in dollars in this chart:

Pretty wild, wouldn’t you say? Here’s Wikipedia’s brief history:

The price of bitcoins has gone through various cycles of appreciation and depreciation referred to by some as bubbles and busts.[137][138] In 2011, the value of one bitcoin rapidly rose from about US$0.30 to US$32 before returning to US$2.[139] In the latter half of 2012 and during the 2012–13 Cypriot financial crisis, the bitcoin price began to rise,[140] reaching a high of US$266 on 10 April 2013, before crashing to around US$50.[141] On 29 November 2013, the cost of one bitcoin rose to a peak of US$1,242.[142] In 2014, the price fell sharply, and as of April remained depressed at little more than half 2013 prices. As of August 2014 it was under US$600.[143]

Since Wiki’s post (last August), the price has run up to $20,000 and back down to $10,000.

Bitcoin no longer serves as a storage of value. So why own it? These days, mainly to keep asset ownership and transactions totally private, out of the view of government. It is said that the deep drug industry owns tons of cryptocurrencies.

Most of the interest today is from folks who want to get rich buying and selling the stuff. Speculative interest is exploding, and the financial industry is making it easy–you don’t even have to buy Bitcoins, you can trade futures in them, Lovely.

Because of the volatility, it truly is an excellent trading vehicle for a competent trader. Not many of those around, but there is no dearth of wannabes. Good luck, if that’s you. Buy low, sell high–that’s the idea, anyway.

Cheers,

Rod

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