Had you spent $27 on Bitcoin when it had been produced by Satoshi Nakamoto in 2009 your investment would now be worth over $37,000,000?
Widely regarded as the greatest investment vehicle of all time, Bitcoin has seen a meteoric rise during 2017 going from $777 all how you can $17,000.
Creating millionaires out of opportunistic investors and leaving financial institutions open-mouthed, Bitcoin has answered its critics at every milestone this year and some believe that is just the beginning.
The launch of Bitcoin futures on December 10th, which for the first time will allow investors to enter the Bitcoin market by way of a major regulated US exchange, implies that people are only getting started.
What makes Bitcoin so valuable is that there is a finite amount in existence. There will only ever be a maximum of 21 million Bitcoins and unlike normal fiat currencies, you can’t just print more of these when you feel like. The reason being Bitcoin runs on a proof work protocol: to be able to create it, you have to mine it using computer processing power to fix complex algorithms on the Bitcoin blockchain. Once that is achieved, you’re rewarded with Bitcoin as payment for the “work” you have done. Unfortunately, the reward you get for mining has decreased drastically almost every year since Bitcoin’s inception, meaning that for most people the only real viable way to get Bitcoin is buying it on an exchange. At the existing price levels is a risk worth taking?
Many believe Bitcoin is simply a bubble. I spoke to cryptocurrency expert and longterm investor Duke Randal who thinks the asset is overvalued, “I’d compare this to many supply and demand bubbles over histories such as Dutch Tulip Mania and the dot com bubble of the late 90s. Costs are purely speculation based, and once you look at Bitcoin’s functionality being an actual currency it is practically embarrassing.” For those who don’t know, the dot com bubble was a period of time between 1997-2001 where many internet companies were founded and given outrageously optimistic valuations based purely on speculation that later plummeted 80-90% since the bubble started initially to collapse in the first 2000s. Some companies such as eBay and Amazon recovered and now sit far above those valuations but for others, it had been the end of the line.
Bitcoin was originally created to be able to take power away from our financial systems and put people in control of their own money, cutting out the middle man and enabling peer to peer transactions bitcoin mixer. However, it is now one of the slowest cryptocurrencies in the marketplace, its transaction speed is four times slower compared to fifth biggest cryptocurrency and its nearest competitor for payment solutions Litecoin. Untraceable privacy coin Monero makes transactions even quicker, boasting the average block time of just two minutes, a fifth of that time period Bitcoin can get it done in, and that’s without anonymity. The world’s second biggest cryptocurrency, Ethereum, already includes a higher transaction volume than Bitcoin despite being valued at only $676 dollars per Ether compared to Bitcoin’s $16,726 per Bitcoin.
So why is Bitcoin’s value so high? I asked Duke Randal the same question. “Everything goes back to the same supply and demand economics, relatively there is not quite definitely Bitcoin available and its recent surge in price has attracted a lot of media attention, this with the launch of Bitcoin futures which many see as the very first sign Bitcoin will be accepted by the mass market, has resulted in a lot of people jumping on the bandwagon for financial gain. Like any asset, if you have a greater demand to get than to sell, the cost goes up. That is bad because these new investors are entering industry without understanding blockchain and the underlying principles of these currencies meaning they will likely get burnt “.
Another reason is that Bitcoin is incredibly volatile, it’s been recognized to swing up or down tens of thousands of dollars in less than a minute which if you are not used to nor expecting it, causes less experienced investors to panic sell, producing a loss. That is still another reason Bitcoin will battle to be adopted as an application of payment. The Bitcoin price can move substantially between the full time vendors accept Bitcoin from customers and sell it on to exchanges for their local currency. This erratic movement can get rid of their entire profitability. Will this instability disappear completely anytime soon? Unlikely: Bitcoin is a relatively new asset class and although awareness is increasing, only a very small percentage of the world’s population hold Bitcoin. Until it becomes more widely distributed and its liquidity improves significantly, the volatility will continue.
So if Bitcoin is pretty useless being an actual currency, what are its applications? Many believe Bitcoin has shifted from being a viable kind of payment to learning to be a store of value. Bitcoin is similar to “digital gold” and will just be used as a benchmark for other cryptocurrencies and blockchain projects to be measured against and traded for. Recently there has been stories of men and women in high inflation countries such as Zimbabwe buying Bitcoin to be able to keep what wealth they have rather than see its value decline underneath the recklessness of its central banking system.
Could it be too late to get involved with Bitcoin? In the event that you rely on what these cryptocurrencies can do for the world then it is never too late to get involved, but with the cost of Bitcoin being so high could it be a ship for many that has already sailed. You might be better off having a glance at Litecoin, up 6908% for the season or Ethereum which will be up an unbelievable 7521% for the year. These newer, faster currencies hope to reach what Bitcoin first attempt to do in its inception in 2009 and replace government-run fiat currencies.
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