MONEY

Is It Too Late To Invest In Bitcoin?

For those wondering if they've missed the money-making boat.

25/08/2017 11:33 SAST | Updated 25/08/2017 11:33 SAST
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Meet Bitcoin: the digital currency on everyone's lips.

For non-financey types, the concept of Bitcoin can be daunting. Just when we were wrapping our heads around variable interest rates and term deposits, they go and create a whole new digital currency. Whatever happened to shoving all your money under your mattress and calling it a day?

But with or without our approval, Bitcoin has become a thing, and for those who jumped on it early, a very profitable one.

At the time of writing this article, a single bitcoin was worth just over $5162 AUD according to XE currency converter, while CoinSpot listed the price per bitcoin as $5550.00 AUD.

To give you an idea of how far it's come, in 2010 the bitcoin price was about 1.5 US cents. Let's all spare a moment for the guy who bought $25 worth, threw away his hard drive and then realised as of this month he essentially threw out $7.6 million. Ouch.

But what about the (relative) latecomers to the Bitcoin train? Have we missed out?

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What is Bitcoin?

First of all, let's start with the basics.

As defined by CoinDesk, "Bitcoin is a form of digital currency, created and held electronically. No one controls it. Bitcoins aren't printed, like dollars or euros -- they're produced by people, and increasingly businesses, running computers all around the world, using software that solves mathematical problems."

Bitcoin is traded digitally, but that's not what's new or exciting about it. Where it stands apart is due to the fact it's decentralised, meaning it isn't controlled by any one institution. Instead, it relies on a peer-to-peer structure, by a community of people that anyone can join.

These peoples are called 'miners' and they use computing power to verify bitcoin transactions. As an incentive, every time they verify a block of transactions, they get bitcoin as well.

Who invented it?

Bitcoin was invented by Satoshi Nakamoto in 2008, but it didn't go online until 2009. Also, because it's the internet and anything can happen, Nakamoto's actual identity has never been able to be confirmed. (Interestingly, Australian Craig Wright has claimed he is the true Bitcoin founder, though he has failed to provide sufficient proof.)

Can Bitcoin make me money?

Ah. The (literal) million dollar question. As we've covered before, if you bought some bitcoin when it first started and was trading at a measly couple of cents, you probably would be sitting on a yacht right now being fanned with a palm frond and not reading this article. (Or reading it in order to laugh at peasants. Whatever, it's your time, spend it how you wish.)

But millionaire status doesn't only happen for those who invested at the very beginning. One Idaho teenager invested $1000 in Bitcoin just three years ago and now has over a million dollars.

But what about investing now?

There are a couple of important things to consider.

Controlled supply

It's important to note there is a limit for how many bitcoins can be created, with a maximum amount of 21 million. However even with this cap, there won't ever be the full amount in circulation, as some unlucky people have lost their keys (and thus their access) along the way.

According to Quora, "As of June 1st, 2017 there were 16,366,275 BTC out of a total 21,000,000 BTC in theoretical supply, which has yet to be mined".

So, just as there is only so much gold to be mined in the world, there is only so much bitcoin, too. And the important thing to note is there's still some left.

As such, there is an argument to say you're not too late to jump on the Bitcoin bandwagon.

"Buying Bitcoin now is not too late," CEO of digital currency management company Bron.Tech, Emma Poposka told HuffPost Australia. "If we see full adoption in the future, or mainstream adoption, the price still has to go up in value because we have a limited supply."

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This would probably be life right now if we have all bought bitcoin back in 2009.

If you're thinking, 'But can't they just make more bitcoin?' that's the beauty of the currency not being controlled by a single institution.

In order to change the protocol surrounding Bitcoin, every miner needs to vote on the decision. Now, don't forget miners are paid in bitcoin for their services, so why would they vote to decrease the value of their own assets?

"No one can change the protocol. There's no one party that can change it," Poposka said. "If someone wants to change something in the Bitcoin protocol, they have to vote. It's a very democratic process.

"Every miner has to vote for the change to take place and most of the miners have bitcoin already. Voting to increase the supply would be voting to decrease our bitcoin worth, so it wouldn't make sense."

However, that's not to say the miners always agree. In fact only recently (August 1) Bitcoin split into two derivative currencies, Bitcoin Classic (BTC) and Bitcoin Cash (BCH) as a result of two competing factions within the Bitcoin industry being unable to come to an agreement about the currency's future. You can read more about the fork and its implications here.

Other digital currency

With all the hype surrounding Bitcoin, it's easy to forget it's not even the only digital currency out there. The reason it's the most famous is because it's the first of its kind, but it's not alone.

"Bitcoin is not the only currency today which is valuable to -- I wouldn't say invest, I don't like the term -- but to buy or hold," Poposka said. "There are other currencies as well.

"So according to your idealistic views of the world or what you personally think is right, you can buy or hold or trade [whichever currency] you think is [promising].

"So now we have Bitcoin, and the biggest rival of Bitcoin is ethereum.

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Ethereum is Bitcoin's biggest rival.

"My company as a company has a native currency The Bron, which is another currency people can buy, hold and trade. It's backed by an asset which we think in the digital world is valuable, which is data.

"Bitcoin is the most popular because it's the oldest."

In Poposka's point of view (which she shares with the disclaimer she is not a financial adviser), it's worthwhile looking at the different currencies available and seeing if any appeal to you.

"Every currency comes with a white paper or a kind of description saying this is why the currency should succeed. If that makes sense to you, then maybe buy $20. It's an individual decision," she said.

Risks

As with any investment, Bitcoin comes with risks. And according to Eric Lim, senior lecturer at the School of Information Systems and Technology Management, UNSW Business School, one of the biggest risks is if a major government decides to step in and enforce regulations on how miners operate. Or, even worse, issue its own cryptocurrency.

"The very fact a lot of the mining power currently resides in China is kind of worrying, especially if the Chinese government decides to put in some regulations as to how the miners can operate. That could cause a huge ripple in the price of bitcoin," Lim told HuffPost Australia.

"So for people who are thinking about whether I should go into buying or investing in Bitcoin right now, I would say go in with caution. The appetite for speculation is still pretty strong, so the price is still likely to rise at this point of time but I wouldn't throw my entire nest egg in.

"If the central Chinese government decides to really regulate it and issue its own cryptocurrency, that would really see the price [of Bitcoin] plunging."

If the Chinese government issued their own cryptocurrency, of course they are going to ditch the bitcoin. No sovereign country can have two parallel currencies running, it's too unstable.Eric Lim

And according to Lim, these changes are not only possible, they are likely -- albeit still a long while off.

"It is a real concern because no sovereign country is going to say, 'Look we're going to accept Bitcoin as it is'. Because they have no control. It's a decentralised currency, no single country has control."

However, because there are serious advantages to cryptocurrency and the inner workings of blockchain (more on that here), Lim argues the concept is too tempting to throw out the window completely.

"There is value in how the cryptocurrency operates and how the blockchain works. So yes, for example, it's a great way to control money laundering or control corruption, and if everything goes digital, it will be easier for the central government to keep track of everything.

"But if the Chinese government issued their own cryptocurrency, of course they are going to ditch the bitcoin. No sovereign country can have two parallel currencies running, it's too unstable."

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Look at this smug Lego man with his bitcoin. Who told him to invest?

As to what to take away from all this?

"People thinking about whether to invest, I would advise them to keep an eye out on major economies like the U.S. or China," Lim said. "So you should be aware when they start talking about issuing own currency. That's when you know the establishments currently accepting Bitcoin aren't going to accept it any more."

In conclusion

Digital currency may not be mainstream just yet, but there's plenty of arguments to say it's not going anywhere soon. Should you invest in Bitcoin before it maxes out at 21 million? Maybe. Both Lim and Poposka think there is potentially money still to be made.

But should you take out a second mortgage? Perhaps not.

"What I tell to my friends and myself and my colleagues is yes, people should start experimenting and buying small amounts of Bitcoin. You don't even need to buy an entire bitcoin -- you can buy part of one for $10," Poposka said.

"It's an interesting technology and I think it's worthwhile to buy small amounts you can play with and learn from. But I would never recommending seriously investing in something you don't understand -- and that applies to everything, real estate or stocks or Bitcoin.

"I'd be more inclined to pay $50 for small portfolio of cryptocurrency and play with it. If everything fails you will lose $50 and that's nothing.

"Then if you learn enough and get excited by the technology, you can decide whether to buy more."