Last Updated: 27 March 2023
Make sure you have read what bitcoin mining is in part 3 of our bitcoin basics series.
If you have ever thought investing in Bitcoin, you have heard conflicting opinions, with critics suggesting that it’s a ‘fraud,’ a ‘scam,’ or even a ‘bubble.’ The question on everyone’s mind that is interested in Bitcoin, or cryptocurrencies in general, is whether it will succeed.
Bitcoin is, at its core, a new revolution supported by a new technology – the Blockchain – with which humans have never previously dealt.
Bitcoin and the Blockchain, like any new technology that arises over time, have immense potential – but that does not necessarily mean that they are without risk. Neither is perfect nor is it without room for improvement in the future.
In and of itself, Bitcoin appears to be the next step in the development of money, resolving some of the most fundamental issues with our current financial system. It proposes to be a global, community trade and value storage mechanism that functions without the intervention of governments, central banks, or other authorities.
As more investors have entered the market, the price of a single coin has risen from less than one cent to more than $20,000 USD. All these elements have given Bitcoin a mysterious image in the media, causing financial markets to either be excited or frightened.
Is Bitcoin a speculative bubble?
One of the first arguments that interested parties will undoubtedly hear is that Bitcoin is just a bubble, similar to the ‘dot com’ revolution and crash that launched in the late 1990s and early 2000s.
The parallels are not accidental. The advent of Bitcoin and the Blockchain is similar in concept to creating websites on the World Wide Web; both have witnessed a dramatic growth in the price of resources, a lot of public interest, and stories of investors making huge profits have found a home in the media.
Bitcoin is intriguing because it creates a new store of value that is not dependent on central banks, paper currency like the US dollar, or even gold or silver. Bitcoin is unaffected by centralized institutions like Bitcoin, and there will never be more than 21 million Bitcoins in existence.
Furthermore, Bitcoin is based on mathematical evidence, and while storage mechanisms (such as Bitcoin wallets) can be hacked, it is theoretically un-hackable. The fact that the cryptocurrency is based on a decentralized network makes fraud nearly difficult; yet, it is crucial to emphasize that fraud with Bitcoin, like with the dollar, is still feasible.
In terms of these basic concepts, Bitcoin can be a fantastic alternative to our current financial systems based only on mathematical proof via Blockchain.
However, there is no way of understanding whether Bitcoin is an “investment bubble.” Despite the predictions of renowned market analysts, Bitcoin has continued to gain popularity. There is no definite way to explain whether the cryptocurrency will continue to go up or decline in favor of something else at some point in the future.
Bitcoin (and other cryptocurrencies) prices are inherently volatile. The international position on Bitcoin and the Blockchain remain uncertain due to their recent development.
The decision of foreign institutions (central banks or governments) to accept, regulate, or restrict cryptocurrencies can significantly impact Bitcoin’s every day (or even hourly) price.
Whatever Bitcoin’s financial future holds, the technology and philosophy that supports it as digital money will never be eliminated. Thousands of additional cryptocurrencies exist now, all of which use the Blockchain principle in unique and exciting ways. Other digital currencies (or other ideas based on the same technology) are likely to arise in the future.
To completely destabilize Bitcoin, every computer or network component running Bitcoin software worldwide would have to be turned off. There is no technique to do this because all these networks are individually operated and distributed worldwide.
Investing in Bitcoin is a fantastic opportunity, but it also comes with a lot of risks. By investing in Bitcoin, you are not only possibly earning money, but you are also potentially becoming a part of the next evolution of the global financial system.
In contrast, as countries and central banks struggle to keep up with Bitcoin’s popularity, investors risk losing all of their money or violating the terms of newly enacted regulations or tax laws.
Only invest funds that you are absolutely willing to lose if you want to invest in Bitcoin (or other cryptocurrencies).
Is Bitcoin a fake trade?
While investing in Bitcoin should be done with caution due to the relatively unpredictable nature of cryptocurrency markets, neither Bitcoin nor its underlying technology, the Blockchain, is a fraud.
Unfortunately, due to some of its early users, Bitcoin has created a reputation that surpasses it in some places.
Because Bitcoin is decentralized and does not pass via a central regulator, it found an early home among illegitimate online circles. Furthermore, because Bitcoin is somewhat anonymous, it was used to power some of the transactions on the massive online black market known as “The Silk Road” until the US Federal Bureau of Investigation shut it down.
Software attackers have occasionally demanded that ransoms be paid in Bitcoin or other cryptocurrencies, citing the confidentiality of transactions as a reason.
Because of these factors – as well as the fact that no one can claim ‘ownership’ of Bitcoin – the cryptocurrency has received a lot of negative attention, which can sometimes hide the potential of its underlying technology.
Because Bitcoin is usually characterized as an “unjustified trend” with “little or no value” beyond what individuals are willing to pay for it, many renowned investors have dubbed it a “scam” or “pyramid scheme.”
Some investors have declared that the millions of people who are putting money into Bitcoin should be prepared to “kiss their money farewell” at any time.
While Bitcoin has definitely sparked the interest of many on the street, there is no strong argument to suggest that Bitcoin as a whole is without merit.
Bitcoin’s foundation is based on technology and mathematical evidence. While it is not linked to a rare commodity like gold or silver, paper currencies like the US Dollar & the British Pound are no longer connected to precious metals.
Consider what gives a paper currency like the US Dollar its value as an essential thought experiment. The most basic and abstract response is that fiat currencies have value because people believe in them. If you thought a US Dollar was worthless, you would not accept it as payment for things – and the same may be said regarding Bitcoin.
For people who live in well-functioning societies where the government can be expected to act responsibly or adequately, this concept is difficult to fathom. It only looks at nations like Zimbabwe and Venezuela to see how quickly a currency’s value may collapse when people lose faith in the government that backs it.
Bitcoin’s future and valuation will be defined by how people accept and use it around the world. Bitcoin has arguably evolved into a type of “digital gold” in which investors have invested their funds. Suppose retailers worldwide accept Bitcoin as payment for goods or services. In that case, cryptocurrency might become a more active trade method in the future, similar to how paper money works.
The future, as they say, is still in motion.
We will explore the legality of Bitcoin and the positions foreign communities have taken on cryptocurrencies in part five of our Bitcoin Basics series.
