11 IMPORTANT FACTS ABOUT BITCOIN THAT EVERYONE SHOULD KNOW
Despite its popularity in the modern financial world, Bitcoin is still a widely misunderstood topic. Here are 11 essential facts about Bitcoin that will make you understand the phenomena and what lies behind it.
1. Bitcoin: Asset or Currency?
It is important to understand that Bitcoin is more of an asset than a currency. Although, this topic is an ongoing debate, Bitcoin has many characteristics of an asset. There are several advantages to Bitcoin being treated as an asset:
· Bitcoin is illiquid because it is not easily convertible into other tangible assets. Bitcoin is not traded as frequently due to its storage value as an asset. It is also termed as a fixed asset because there are a finite number of Bitcoins (21 million) that will be in the market. These characteristics of Bitcoin make it similar to a gold.
· Bitcoin is not integrated with or tied to the conventional market. It is treated as a new investment vehicle categorized as a high-risk alternate investment. Bitcoin and other cryptocurrencies have increased the scope of investments.
· Bitcoin is highly volatile like other risky assets. Trading Bitcoin requires a more complex risk-reward analysis.
· Bitcoin provides a comparatively low barrier of entry in comparison to more complex types of assets that demand more capital because they have to be traded in multiples of one unit and cannot be fractionalized. Due to this distinction, Bitcoin has the advantage of equalizing asset possession and growth of wealth.
· Buying Bitcoin does not require brokerage account or any experience in trading securities. One can open an account, prove ones identity, transfer funds and buy a Bitcoin, or a fraction of Bitcoin.
· Negative news about Bitcoin may affect its short term pricing, however, the long term expectations are generally bullish.
· It is seen that the common trend is for new users of Bitcoins to buy and store the cryptocurrency in their exchange wallets and then waiting for a significant increase in value. Bitcoin is usually not bought for using it as a currency to purchase goods and services.
2. Why does the BTC price keeps rising?
There are several reasons for BTC price to rise so dramatically. Here are some interesting facts to consider:
i. It takes a significant amount of energy, time and costs to mine Bitcoins and maintain the cryptocurrency network. The number of miners and developers of Bitcoin runs in the thousands.
ii. The total number of bitcoin users are not known, some estimate it to be around 10 million owners. Coinbase has over 11 million accounts.
iii. Since being introduced in the market, Bitcoin has been through to an excess of ten large-scale bubbles and is seen to be stabilizing.
iv. 50% of the market capitalization of cryptocurrencies is occupied by Bitcoin.
v. One reason for an increase in the price of Bitcoin is due to limited supply. There will be a limit on the number of Bitcoins (21 million) against the world population of 8 billion.
vi. The Bitcoin market is decentralized and not administered by governments, banking industry, or large corporations.
vii. Blockchain technology enables Bitcoin to be corruption-free. It provides digital transparency and enables trust between negotiating parties.
viii. Every year, the number of Bitcoin users rises by an excess of 2 million globally. The increasing number of internet and smartphone users has bullish effect on its price.
ix. Economic uncertainties also contribute to the rise of Bitcoin price, e.g. future of oil & gas, global financial crisis, rising inflation, etc.
x. Bitcoin does not generate any cash flow, therefore buy and hold, waiting for the price to rise is the only way to generate a positive return.
3. Retirement money can be invested in BTC
Recent trends show that in the wake of conventional modes of investment like hedge funds underperforming in the financial market, more retirement planners are seen to be investing in Bitcoin. Some are directly buying bitcoins and storing them in their Bitcoin wallet, while others are adding stocks like GBTC into their retirement portfolio. It is expected that Bitcoin ETFs will get approved and offered by several brokerage firms.
4. You don’t have to buy an entire bitcoin
Most people assume that they have to buy a complete Bitcoin to qualify for a start in their cryptocurrency experience. In reality, Bitcoin is divisible and one can trade and move even fractions of Bitcoins. Consider the following math:
1 bit = 0.000001 Bitcoin
1 satoshi = 0.00000001 Bitcoin
So similar to a dollar being divided into cents, a Bitcoin too can be broken down, in fact almost infinitely, into smaller units. The smallest unit of a Bitcoin is termed a Satoshi. One Bitcoin is equivalent to 100,000,000 Satoshis. It is indeed very practical to divide a Bitcoin into smaller units in the face of ever-escalating Bitcoin prices, enabling users to trade even small fractions of Bitcoins, as per their needs.
5. The Advent of Bitcoin Futures and Price Stability
The recent announcement by the world’s largest futures exchange CME that it will launch bitcoin futures trading, sky-rocketed Bitcoin’s price to astronomical levels. CME recognition of Bitcoin as a legitimate asset class is expected by investors to gear further price growth and pave a way for retail adoption of Bitcoin to come through.
Investors are increasingly optimistic regarding Bitcoin futures, as institutional investors will help usher price stability and liquidity into the infamously volatile Bitcoin market. Experts are of the opinion that the Bitcoin Futures market will bring in long-term stability and liquidity. There is expected demand from both big institutional and small retailer traders.
The recent rise and then dip in Bitcoin price was not surprising for most speculators, who were saying that bitcoin futures will stir price levels across coin exchanges, leading to speculative arbitrage and consequent profiting, until the prices level out. At the same time, as the coin exchange market grows and matures in line with growing liquidity of futures contracts, the price levels will line up across exchanges. It will also not seem surprising if this derivative futures market grows larger than the fundamental Bitcoin market, such as is the case with crude oil, gold and most fiat currencies.
With futures trading, new investors can benefit from Bitcoin price fluctuation without owning Bitcoin. There will likely be an increased liquidity given that the contracts can be settled in dollars. They also provide a cover against real-time market volatility in Bitcoin prices.
The futures market is also expected to bring a much-desired legitimacy and validity to Bitcoin as an asset, hence prompting institutional investors to step in. In an interview with CNBC, Terry Duffy, the Chairman and CEO of CME said “Today you cannot short Bitcoin. So, there’s only one way it can go. You either buy it or sell it to somebody else. So you create a two-sided market, I think it’s always much more efficient.”
6. Bitcoin ETF approval will create broader market of Bitcoin investors
With CME Group Inc. and Cboe Global Markets, two of the largest future exchanges in the world, announcing their launch of Bitcoin futures derivatives, many ETF advocators have pressed for SEC approval of ETFs.
Eddy Travia, CEO of Coinsilium (a company that finances and manages the development of start-up blockchain technology firms) stated a main reason for SEC hesitation toward Bitcoin ETF approval “could be some issues around the recognition and classification of Bitcoin as a specific asset class and the provenance of the coins.” Travis terms cryptocurrencies as a “de facto new asset class” and adds that investor demands across a broad market range, both institutional and retail level, will escalate to a position where “regulators will no longer be able to postpone the ineluctable approval and trading of crypto instruments on regulated financial markets.”
Futures are seen to bring Bitcoin into the conventional and regulated marketplace and make it accessible to a broad range of investors in a regulated way, without requiring it to be stored as an asset. Increased liquidity in the futures market will draw more investors, narrowing the spread and bringing down market volatility. At this point, most investors are awaiting futures contracts to bring in a boosted market efficiency and a much-needed legitimacy to Bitcoin as both a convenient exchange medium and more reliable asset for storage alike.
7. People have started to buy tangible goods with Bitcoin
Bitcoin acceptance is growing steadily. One can now buy tangible goods and services with Bitcoin, which may include a wide variety. For e.g. you can use Bitcoins to buy gift cards for retailers that do not engage in Bitcoin transactions. These cards are available at sites like Gyft and eGifter. Other items you can purchase using Bitcoin include pizza from a variety of food-chains, via websites like PizzaForCoins, computers and even airline and hotel tickets. At an individual level, people are offering different commodities and services in exchange for Bitcoins.
Large companies like Microsoft (Windows phones and Xbox platforms) and Expedia now accept Bitcoin as payment. Dell has partnered with Coinbase in accepting Bitcoin payments and other well-known names like Overstock.com, TigerDirect and Monoprix have jumped upon the bandwagon too.
Bitcoin ATM services are also available in more than 60 countries in the world. As Coin ATM Radar informs, there are an excess of 800 Bitcoin ATMs in the United States as of 2017 with Canada offering Bitcoin ATM services in 321 locations, Austria 93. One can exchange Bitcoin for cash and vice versa via these ATM machines
8. The real innovation is blockchain technology, not Bitcoin
The system of the world’s economical, legal and financial organizations is dependent on essential and crucial instruments such as contracts, and records of transactions for legality and directive purposes. However, in the digital environment, regulation and administration still needs a defining body or system of recordkeeping. Recently, with the advent of blockchain, there is finally a method available for managing and regulating transactional records in the digital medium.
Blockchain is the technology that makes Bitcoin and other cryptocurrencies possible to exist and operate as financial tools. Blockchain is described as an open, decentralized and distributed ledger that maintains a record of ongoing transactions between business parties and individuals alike. Think of blockchain as contracts rooted in digital code and preserved in publicly accessible and shared databases, and protected from altering, fraud manipulation, modification and deletion.
In the modern business environment, it is absolutely crucial to digitally document and preserve all processes, agreements, contracts, tasks that ever take place, so that they can be available for identification and validation by the public. Compared to a central body with sole access to these records, blockchain makes them available for anyone to see, whether individuals, firms, or machines. Thus, blockchain is revolutionary and the real innovation behind the cryptocurrency technology. Blockchain proposes the ability to act as a reliable foundation for validity and accounting for entire economic and social structures.
Blockchain works by providing a system where copies of an open ledger are stored in many identical databases, which are hosted and managed by volunteers. As new entries are made in one copy, the other copies are updated at the same time and made publicly available for scrutiny. Hence, there is no requirement for a third-party mediator to oversee and validate transactions. There is no need for a “middle-man.”
Blockchain is the most prominent of all modern technologies that has, and will continue to hold the most impact and influence on business and social systems. Blockchain is as big as the internet. Consider the fact that the cryptocurrency phenomena created by blockchain is now worth almost $370 billion. Benjamin A. Smith, a prominent at Lombardi Financial noted “If Bitcoin only achieves a quarter of what experts think can happen, it’s still super cheap. Bitcoin’s entire currency valuation is only around $180 billion, which is peanuts in the greater scheme of world finance pre-eminence”. Likening Bitcoin to Microsoft, Smith added “It’s akin to thinking that Microsoft Corporation was expensive in the early days at $10.00/share just because it had risen 12-fold the year before. It’s not how far price has come, so much as how far it can travel.”
9. Bitcoin price is dependent on speculation
Bob Doll, a strategist at Wall Street and chief equity strategist at Nuveen Asset Management observes that it may be investor speculation that is a cause for establishing the Bitcoin price boom “‘With bitcoin, why do you need the stock market?’ has been the saying of late,” Doll notes. “I confess it’s an area of that to me feels speculative, but you might call me old or old-fashioned. It’s been an amazing run, has it not?”
Many others believe the value of Bitcoin lies in the speculation as to what price a future purchaser may pay. Since speculation is the chief instrument here, there is bound to be wild fluctuations in price. Seth Andrew Klarman, an American investor and hedge fund manager wrote in Margin of Safety:
“Just as financial-market participants can be divided into two groups: investors and speculators. Assets and securities can often be characterized as either investments or speculations. The distinction is not clear to most people. Both investments and speculations can be bought and sold. Both typically fluctuate in price and can thus appear to generate investment returns. But there is one critical difference: investments throw off cash flow for the benefit of the owners; speculations do not. They return to the owners of speculations depends exclusively on the vagaries of the resale market.”
Some of the most important factors influencing Bitcoin price include market demand and supply, the total number of Bitcoins and rising amount of Bitcoin wallet holders, news in media, high volatility of Bitcoin, threats to security via hacking attempts and server attacks, as well as political and economic factors.
10. It’s hard to predict where BTC price will stabilize
With large governing bodies like the Federal Reserve, tools such as equities and the financial market are providing stability to a certain degree. If Bitcoin is viewed legitimate by governing bodies, more investors will view it as an important long-term investment option and thus drive prices to stabilize over time. As noted earlier, ETFs hold the promise to provide stability to the volatile cryptocurrency market and endorse Bitcoin as a long-term investment in the eyes of legal bodies. Experts see the next ten years as observing a noted stability in Bitcoin pricing.
Economist Yves Lamoureux forecasts an “end target of $25,000 or more” concerning Bitcoin’s price. He says “One of the reasons people buy gold is to avoid the dilution of fiat money,” explains Lamoureux. “This is why we are convinced that digital money or cryptocurrencies will eventually find its appeal with hard asset investors. And as blockchain becomes more ubiquitous, it lends credibility to the technology behind bitcoin. We feel that digital currencies, such as bitcoin, have now entered a similar cycle.”
Where will the price of Bitcoin land is anybody’s guess. The immediate next level of support, past $20,000 is expected to be $40,000, followed by $60,000. Beyond this, the world is divided into two. Many say it will cross $100,000, then $350,000 and even $500,000. However, there is are a growing number of skeptics who have good reasons to believe that the price will eventually crash to $0. One thing is certain, anyone buying Bitcoin must be willing to lose all of their money because other than the possibility of price crashing to $0, there are threats of being hacked or simply losing the address of your offline wallet.
The problem with predicting Bitcoin price is that there is no true example in history that is comparable to Bitcoin as an asset (or a currency). There have been other commodities that have had similar price jumps, but their nature, market, geographic and economic surroundings were different.
11. Bitcoin’s correlation with the stock market
The recent surge in the price of Bitcoin has made it clear that there is no strong correlation between Bitcoin and the stock market. However, back in August, Nautilus Investment Research stated that Bitcoin and the stock market are dependent on one another, in influencing price.
In an August 7 Twitter feed, Nautilus observed that “Bitcoin and SPX (the S&P 500 index) are trading together year to date.” It also noted that “Bitcoin rate of change acceleration drives SPX returns.” Nautilus explicitly records that each time Bitcoin prices escalate by 30%-or-more in a month, stocks climb higher, as well, in the next few months.
Bitcoin and SPX trading together year to date — Bitcoin rate of change acceleration drives SPX returns
Source: https://twitter.com/i/web/status/894594857288830976
However, there are disagreements to this proposition from Wall Street. Zach Hamilton, managing partner of General Crypto says “Starting with the most obvious, the size disparity between U.S. stocks and Cryptocurrency markets is massive. Stocks traded on the New York Stock Exchange alone are worth more than $120 trillion in U.S. dollars, while the total global value of all cryptocurrencies in existence is just over $120 billion.” (Current market cap is $370 billion). Hamilton, who quotes data from ARK which points out a “weak correlation” between the S&P 500 and Bitcoin pricing observes the market boom, but not because the stock market is responsible for the growth “When you look at the size of the boom, as well as the concentration of gains from this boom, you can see that it is nowhere near a meaningful level of movement to affect the general stock market. The stats around this are staggering, and thanks to the blockchain they are all public.”
Frederick Coleman, manager of media and communications at Blockonomics says “From my own experience the stock market and Bitcoin aren’t that linked. Take the last couple of days, Bitcoin has been surging in price while the stock market hasn’t.” Coleman believes that Bitcoin and the stock market are influenced by different reasons. “Bitcoin is influenced by technical factors, countries changing rules surrounding Bitcoin, media coverage, and other things of that nature, and those things don’t influence the stock market.”
Coleman also views that Bitcoin is not affected by the stock market. As he puts it “I think this is largely, because those who invest in Bitcoin are often strong libertarian or anti-big corporation, and like Bitcoin’s decentralized nature. These people aren’t going to invest in the stock market.”
Chris Burniske, co-author of Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond notes “We’re starting to see bitcoin as a disaster hedge to the traditional market. Even though there’s a bull market now, it doesn’t mean that’ll be the case in 2018.”
However, David Yermack, a teacher at New York University’s Stern School of Business said, “In terms of diversification, it’s useful to have a little in your portfolio, but the fact that you don’t understand why it’s moving doesn’t mean it’s safe. If anything, the lack of explanation should make you more hesitant.”
Yermack maintains his belief that cryptocurrency, blockchain technology will gain larger understanding and wider usage with time. “It’s going to be a profound change. Every central bank in the world has a team of people looking at this.”
