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Unless you've been living under a rock for the past five years, you are probably more than aware of the phenomenon of Bitcoin. But what actually is it? And could it ever replace traditional currency as a means of exchange?
Here we take a quick look at Bitcoin and explore its potential future as either an alternative to currencies or as an investment vehicle or both.
But first a required set of disclaimers.
This article is not intended to provide investment advice. All readers should please conduct their own thorough research before investing in any cryptocurrency. This writer does not have an investment in any cryptocurrency.
RELATED: UNDERSTANDING CRYPTOCURRENCY: HOW IT WORKS, WHAT DRIVES IT, SHOULD YOU BUY IT?
Can Bitcoin be converted to cash?
It most certainly can. By using the right steps you can readily convert Bitcoin into regular fiat currency and transfer it to your bank account.
But this, in a way, defeats the object of cryptocurrencies. They were, after all, devised to one day compete or even replace traditional currencies.
It was hoped from their inception that they could be used as a means of exchange. You could, and can today, makes purchases for all your favorite things.
But, as you may have noticed, very few businesses, and individuals, currently accept Bitcoin for payments. For this reason, it is understandable that if you do have some Bitcoin in your "wallet" that you might want to consider converting it to cash - - especially if it has appreciated against the dollar.
Of course, the opposite is also true. You may want to cut your losses after a "crash" in the relative exchange value of it and wait for a recovery.
Currently, there are several ways you can do this.
1. Sell on a crypto-exchange - You can use platforms like Coinbase or Kraken. This is one of the simplest and safest ways of doing this. Once sold you can then draw down to your bank account with ease.
2. Make use of a Bitcoin ATM - At present there are an estimated 2,200 Bitcoin ATMs around the world. If you have one near you, this is another simple way of converting your crypto to cool hard cash.
3. Get yourself a Bitcoin debit card - There are some websites out there that let you sell your Bitcoin to them to credit a prepaid debit card.
4. Sell your Bitcoins to your friends or family - If you have like-minded friends and family who also have Bitcoin, you can directly sell yours to them for fiat currency. You will, of course, need to have a high level of trust between you for this kind of private exchange.
How does Bitcoin make money?
With all the news of Bitcoin's gains and losses, you might be wondering if it is a viable investment vehicle to make some cash. But Bitcoin is not really intended for this purpose.
As we have already explained, Bitcoin and other cryptocurrencies, are actually meant to, one day, supplant fiat currency as a means of exchange for goods and services. The difference is that it should, in theory, make transactions incredibly secure and free of potential fraudulent activity.
But with regard to making money from it, you most certainly can. In fact, if you'd "invested" in Bitcoin from its early days you might well have become a millionaire today.
If you are savvy enough to buy low and sell high then you could, in theory, make a nice amount of cash as a consequence. But a word of warning, due to the high variability of cryptocurrency you can quite easily lose money too.
Its relative value against currencies is driven, like more traditional stocks, bonds, and other investment vehicles by its perceived value in exchange for something else. It is, in effect, an agreed amount between the buyer and seller.
Like any investment vehicle, you should not even begin to invest in something if you don't really understand it or have a plan. While becoming a crypto expert is probably a bit OTT, you should garner a thorough understanding of what you are getting in to.
"You need to understand how it works as an investment, how liquid it is (ie, can you get out when you want to), the level of risk and what can drive the price up to and down." - Martin Lewis of the Money Saving Expert.
If you want to speculate on the price of Bitcoin in the future, you should also be aware that this is actually a form of gambling. Especially if you don't know what you are doing.
You should also be made aware that Bitcoin exchanges often have fees associated with them and mining bitcoin attracts overheads from electrical consumption.
The same is true for more traditional FOREX (Foreign Exchange). This can be the ruin of many a want-to-be investor the world over.
But that is not to say you can't make a lot of money doing it. So long as you are aux fait with what drives changes (geopolitics etc) in relative values of currencies (and cryptocurrencies) you might want to risk a small amount of your actual cash.
But, ultimately, make sure you only invest, or risk, as much money as you can afford to lose. After all, history is filled with similar economic bubbles - - "tulip fever" anyone?
Is Bitcoin a good investment?
As nobody can actually see the future this is not an easy question to answer. In hindsight, if you'd invested early then yes Bitcoin has been a good investment, but what about the future?
Whether or not Bitcoin will continue to rise over time is anyone's guess. There are many experts on both sides of the argument who will make well researched and constructed arguments to support their claims.
But, at the end of the day, none of them are able to actually see into the future. Anything can, and usually does happen.
When it comes to investing in anything, the golden rules of the game are to do your due diligence on the potential investment at hand. You must also develop an entry and exit strategy for your investment.
But something that does go in Bitcoin's favor is the fact that it is a limited resource by design. With a total pot of 21,000,000 tokens built into the system, it should mean that it at least holds its value over the long run.
The main problem with traditional currencies is that central banks can, and usually will, create (print) more of them over time. This is the main driver for inflation and currency's erosion in buying power over time.
With there being a cap on the total of Bitcoins that will ever be "mined", their relative value against a constantly devaluing fiat currency should be a safe bet.
However, as economists like Carl Menger and Eugen von Boehm-Bawrk believed, the value of anything in this world is subjective. If nobody wants something, it doesn't have any real tangible value to them - - they'd rather keep their cash in their pocket.
If someone values, or perceives the value of, their dollar or pound over something as ethereal as Bitcoin they won't make an exchange. It is for this reason that many people have not signed up for Bitcoins, or other cryptocurrencies for that matter.
They simply either don't understand it or would rather put their trust, rightly or wrongly, in more traditional backed currencies by institutions like banks and governments.
Is Bitcoin money?
If by "money" you mean fiat currency like pounds or dollars, then no it is not. Bitcoin was designed from the outset to be an alternative and replacement for, not another example of, fiat currency.
But Bitcoin could be considered a form of "money" called commodity money. This form of "money" is one of the one's oldest with gold being a prime example.
But it should be noted this is hotly debated. For this reason, the very term cryptocurrency has been widely adopted to differentiate things like Bitcoin from other means of exchange.
Bitcoin is, by definition, a decentralized digital means of exchange. It has no central bank or administrator as fiat currencies or what most people understand as "money" do.
Bitcoin and other cryptocurrencies are a peer-to-peer system that cuts out any "middle men." Transactions between peers are made using a node of networks where all transactions are recorded on a distributed, or shared ledger.
While, as we have seen, they can be exchanged for regular fiat currencies, their intended purpose was to be exchanged for goods and services between peers on their own.
But, like anything in life, cryptocurrencies' perceived value is just that, at least when compared to alternatives like currencies. It is unclear if they have tangible value in and of themselves like, say, a ton of raw material or gold.
At the end of the day, what will determine Bitcoin's future are, to name but a few concerns: -
1. Peoples trust, adoption, and acceptance of it.
2. That its finite nature is maintained at 21 million Bitcoins and perceived value against a tangible good or service.
3. How the electrical cost of bitcoin will affect its future in an ever-increasing environmentally friendly conscious society.
Ultimately, we'll let you decide what you think about the future of this most famous of cryptocurrencies.