E-Currencies Not Just Any Commodities
An advisor at a large brokerage firm, concerned about a friend’s interests, texted him, “Bitcoin: dangerous waters, my friend.” He was referring to the cryptocurrency’s mid-September 2017 dip in value after the Chinese Exchange said it would halt trading. Since then, bitcoin’s value has regained 52%. With a general upward trend, bitcoin will steadily surprise brokers and financial advisors skeptical of its stability. Here’s why:
1. Bitcoin and other e-currencies are valuable commodities
A commodity is a basic good used in commerce, interchangeable with other commodities of the same type. E-currencies are widely accepted and banks are scrambling to integrate blockchain technology into their portfolios. Commodity speculators are profiting from the volatile price movements of bitcoin and others. Though Bitcoin was not designed as a normal equity investment (no shares have been issued), some speculative investors were drawn to the digital money after it appreciated rapidly in May 2011 and again in November 2013. Thus, many people purchase bitcoin for its investment value rather than as a medium of exchange. Many are buying them as investment opportunities, but it is becoming a more and more popular method of payment.
2. Bitcoin and other e-currencies mustn’t reckon with devaluation due to inflation
Bitcoin’s value is dependent on the size of its mining network, since the larger the network is, the more difficult – and thus more costly – it is to produce new bitcoins. As a result, the price of bitcoin has to increase as its cost of production also rises. It is therefore only indirectly affected by inflation. Its value is based primarily on the value of work.
Bitcoin mining is the process through which bitcoins are released to come into circulation. Basically, it involves solving a computationally difficult puzzle to discover a new block, which is added to the blockchain, and receiving a reward in the form of few bitcoins. The block reward was 50 new bitcoins in 2009; it decreases every four years. As more and more bitcoins are created, the difficulty of the mining process – that is, the amount of computing power involved – increases. The mining difficulty began at 1.0 with Bitcoin’s debut back in 2009; at the end of the year, it was only 1.18. As of April 2017, the mining difficulty is over 4.24 billion.
3. Bitcoin and other e-currencies are profiting from the experience of users
The concept of a virtual currency is still novel and, compared to traditional investments, Bitcoin doesn’t have much of a longterm track record to back it. With their increasing use, bitcoins are becoming less experimental every day. But after eight years, they (like all e-currencies) remain in a developmental phase, still evolving.
“It is pretty much the highest-risk, highest-return investment that you can possibly make”
says Barry Silbert, CEO of Digital Currency Group, which builds and invests in Bitcoin and blockchain companies. Nevertheless year by year it is proving to be a more stable method of payment and investment venue.
If you are interested in investing in e-currencies and are wondering when is the right time, the answer is always “an hour ago.”