What Is Bitcoin and Is It a Good Investment?

Bitcoin (BTC) is a new type of digital currency — with cryptographic keys — that is decentralized to a network of computers used by users and miners around the world and not controlled by any one organization or government. It is the first digital cryptocurrency that has attracted public attention and is accepted by a growing number of merchants. Like other currencies, users can use digital currency to buy goods and services online as well as in some physical stores that accept it as payment. Currency traders can also trade bitcoins in bitcoin exchanges.

There are several major differences between bitcoin and traditional currencies (such as the US dollar):

• Bitcoin does not have a centralized authority or clearing house (eg government, central bank, MasterCard or Visa network). The peer-to-peer payment network is managed by users and miners around the world. The currency is anonymously transferred directly between users via the Internet without having to go through a clearing house. This means that the transaction fees are quite low.
• Bitcoin is created through a process called "bitcoin mining". Miners around the world use mining software and computers to solve complex bitcoin algorithms and approve bitcoin transactions. They are awarded transaction fees and new bitcoins generated by solving bitcoin algorithms.
• There is a limited amount of bitcoin in vogue. According to the blockchain, as of December 20, 2013, approximately 12.1 million were in circulation. The difficulty for bitcoins (solving algorithms) becomes harder as more bitcoins are generated, and the maximum amount in circulation is capped at 21 million. The limit would not reach around 2140. This makes bitcoins more valuable as more people use them.
• A public account called 'blockchain' records all bitcoin transactions and shows the respective holdings of each bitcoin owner. One can use public ledger to verify any transaction. This makes digital currency more transparent and predictable. More importantly, transparency prevents fraud and double spending of the same bitcoins.

Digital currency can be acquired through bitcoin mining or bitcoin exchanges.

The digital currency is accepted by a limited number of merchants on the web and in some brick and mortar retailers.

Bitcoin wallets (similar to PayPal accounts) are used to store bitcoins, private keys, and public addresses, as well as to transfer bitcoins anonymously between users.

Bitcoins are not insured and are not protected by government agencies. Therefore, they cannot be recovered if the secret keys are stolen by a hacker or lost to a failed hard drive, or due to the closure of the bitcoin exchange. If the secret keys are lost, the associated bitcoin cannot be recovered and will be out of circulation. For a question on bitcoin visit this link.

I believe that Bitcoin will gain more acceptance from the public as users can remain anonymous when purchasing goods and services online, transaction fees are much lower than on credit card payment networks; The public account is accessible by anyone, which can be used to prevent fraud; The money supply is capped at 21 million, and the payment network is operated by users and miners rather than a central authority.

However, I do not think it is a great investment vehicle because it is extremely unstable and not very stable. For example, the price of bitcoin rose to a peak of $ 1,200 USD from $ 14 this year before falling to $ 632 per BTC at the time of writing.

Bitcoin rose this year as investors speculated that the currency would gain wider acceptance and that it would increase in price. The currency fell 50% in December as BTC China (China's largest bitcoin operator) announced that it could no longer accept new deposits due to government regulations. And according to Bloomberg, the Chinese central bank blocked financial institutions and payment companies from dealing with bitcoin transactions.

Bitcoin will likely gain more public acceptance over time, but its price is highly volatile and very sensitive to news — such as government regulations and restrictions — that could negatively affect the currency.

Therefore, I do not suggest investors to invest in bitcoins unless they were purchased at less than $ 10 USD per BTC as this would allow for a much larger margin of safety.

Otherwise, I believe it is better to invest in stocks that have strong fundamentals, as well as great business prospects and management teams because the underlying companies have intrinsic value and are more predictable.