Cryptocurrency 101 and Is Bitcoin a bubble?
The questions on everyone’s mind the past few weeks has been – is Bitcoin a bubble? If it’s a bubble, when will it burst? If it’s not, is it too late to invest? Of course, there are no definite answers to the questions aforementioned. However, this article will attempt to shed some light onto the topic and hopefully be beneficial to those contemplating an investment into cryptocurrencies.
To cover just the basics, a cryptocurrency is a digital currency that uses cryptography. Cryptocurrencies are desirable due to their organic nature. They are not issued by any central authority which means there’s no room for government interference or manipulation. This may be worrisome for some people due to safety reasons but the cryptography technology is used for security and protection from counterfeit.
The first cryptocurrency to capture the public’s attention was Bitcoin. Bitcoin was launched in 2009 by an unknown individual or group under the pseudonym Satoshi Nakamoto. It is the first decentralized digital currency – meaning it functions without a central bank or administrator as mentioned above. It is a peer-to-peer network as opposed to the traditional banking system because transactions are facilitated between users without an intermediary. Since its introduction in 2009, Bitcoin has taken the financial world by storm. By 2015, there were already 15 million Bitcoins in circulation with a market value of over $3 billion and 100,000 merchants and vendors accepting Bitcoin as a form of payment. Its success led to many other competing coins such as Ethereum and Litecoin to come into existence.
For those who are interested in making an investment in cryptocurrencies, there are a few ways of doing so. The very first way of receiving bitcoins was through mining. Bitcoin mining is the process where transactions are verified and are added to the public ledger – famously known as the blockchain. There are less than 5 million Bitcoins left to be added to the blockchain and mining is the only means of producing them. To mine, one needs special computer software to solve algorithms and then are issued a certain number of bitcoins in exchange. A more straightforward outlet of receiving cryptocurrencies is by simply buying them. There are a number of channels to purchase coins - the most popular and trustworthy service being Coinbase. Coinbase is extremely popular at the moment due to its simplicity and convenience but only sells Bitcoin, Ethereum, and Litecoin at the moment.
There’s no surprise behind Bitcoin and other cryptocurrencies making headlines around the world recently. In the past month, Bitcoin has surged beyond anyone’s expectation – increasing 150% and hitting past the $19,000 mark. Bitcoin’s surge has created a lot of speculation which in result has carried along other cryptocurrencies to go up tremendously as well. Ethereum has gone up 120% in the past month and on December 11th, in just one day, Litecoin increased by 90%. Amid the surge in cryptocurrencies, the exchange Coinbase reached the top of the free app charts on the US app store while opening more than 300,000 accounts in a day - gaining more total customers than banking and brokerage giant Charles Schwab in the process. If all that is not enough, Bitcoin has even penetrated the Jewish world with Kollel Tamid (@TheStollel) tweeting “Bitachon אלא Bitcoin אל תקרא.” All these gains and speculations are surely impressive for the time being, but will the trend continue or will the bubble burst?
I asked Menajem Benchimol, founder of Mena Management – a cryptocurrency consulting and management service on his thoughts on Bitcoin. He said “Bitcoin is making history due to tremendous gains in the past months but there have been a lot of speculations claiming that the trend has to stop eventually. In my opinion, Bitcoin’s rise will slow down at some point due to other coins gaining popularity. Newer and better cryptocurrency alternatives to Bitcoin such as Dash, Litecoin, Monero, Vertcoin, Zcash and Monetha have seen favorable gains and are looking to compete with the behemoth that is Bitcoin. Bitcoin is hot at the moment and it may take a while for it to fall. However, when people will realize that there are far better coins out there, I believe Bitcoins price will fall but the blockchain market as a whole will strive.”
While many economists say Bitcoin is a bubble that will burst any minute, Bitcoins have simultaneously gained a more legitimate reputation in markets and exchanges across the country. Just last week, Bitcoin historically attained US regulatory approval to make its debut on two major global exchanges. The Chicago Mercantile Exchange (CME) and the Chicago Board Options Futures Exchange (CBOE) are the world’s largest exchanges for derivatives products and they have begun to offer contracts for futures of Bitcoin. In the first day of trading on the exchanges, Bitcoin futures surged more than 20% - forcing the CBOE to halt trading twice.
It is clearly hard to determine whether or not the Bitcoin bubble will burst or if it is even a bubble to begin with. However, one must take into consideration Bitcoin’s price continuing to surge and its legitimacy getting closer to institutional acceptance when contemplating an investment into cryptocurrencies. I asked Yosef Kerendian, founder and president of YU’s CryptoCurrency Club on his stance on cryptocurrency investing. He notes that “If you invested $1,000 ten years ago, here’s how much you’d have now:
Netflix: A $1,000 investment 10 years ago would be worth $51,966 today.
Amazon: $1,000 investment 10 years ago would be worth $12,398 today.
Apple: $1,000 investment 10 years ago would be worth $6,228 today.
Alphabet: $1,000 investment 10 years ago would be worth $2,922 today.
Bitcoin: $1,000 investment 8 years ago would be worth $137,649,000 today.”
Yosef continues “Is Bitcoin a bubble? Maybe, maybe not. But here’s one piece of advice that goes a long way: ‘The best time to plant a tree was 20 years ago. The second-best time is now.’ – Anonymous”