Disadvantages
• It is quite a complex currency, which requires some getting used to and learning at first,
especially for non tech-geeks.
• There is some uncertainty as this is the first widely accepted virtual currency of its kind
and hence has no guarantees. The currency is only as strong as the system through
which it operates and the confidence the users have in the product.
• The anonymity has also allowed a number of illegal transactions to take place,
especially on the “deep-web”. Cases have included crimes such as the ordering of
illegal substances and the hiring of a hit-man.
• Still not widely acceptable.
CAN I MAKE A DOLLAR TRADING THIS THING?
The value of a Bitcoin is extremely volatile and is affected substantially and, in some cases,
arbitrarily by global economic and political events. Starting out in early 2009 with virtually
no value, to setting a benchmark value of $1 a few months later, Bitcoin made waves
when it hit $100 at the time of the Cyprian crisis. It then crashed to about $2 and recently
rallied to $1,200.
There are many who believe this is nothing more than a speculative bubble that is likely
to burst anytime between next week, next year or five years from now. In addition, there
is no way to conduct any form of reliable fundamental analysis; there is no residual
value or physical value in the tender. Its value is derived purely from speculation and the
acceptance of this currency globally. Some even compare it to “tulipmania” (see sidebar).
LOOKING FORWARD
Bitcoin is still in an evolutionary stage, or perhaps part of an evolution of the global
payment system. There is no sound method of valuating this currency or predicting
its movements. It is extremely volatile and, in my opinion, illiquid – which makes it
dangerous. The fact that Bitcoin has taken off and accrued value is amazing; however,
no single entity seems to be able to understand it entirely. Maybe you can make sense
of its virtual currency and let the rest of the world know how it is going to perform in
future, or if it even has a future.
TULIPMANIA
Tulipmania was the first major
financial bubble. In 1637, investors
began to madly purchase
tulips, pushing their prices
to unprecedented highs; the
average price of a single flower
exceeded the annual income of
a skilled worker. Tulips sold for
over 4,000 florins, the currency of
the Netherlands at the time. As
prices drastically collapsed over
the course of a week, many tulip
holders instantly went bankrupt.
Investopedia says: Tulipmania
reflects the general cycle of a
bubble: investors lose track of
rational expectations, psychological
biases lead to a massive upswing
in the price of an asset or sector, a
positive-feedback cycle continues
to inflate prices, investors realize
that they are merely holding a tulip
that they sold their houses for,
prices collapse due to a massive
sell off and many go bankrupt.
A similar cycle was witnessed
during the dotcom bubble.
market price
SOURCE: http://
market price (usd)
1,500
1,250
1,000
750
250
0
January 2009 - September 2013
Source: blockchain.info
www.investopedia.com
500
1. Read the European Central Bank 2012 report, “Virtual Currency Scheme”
http://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf
2. Watch a quick tutorial on BitCoin
http://youtu.be/U3i2yR0A5m4
1
2
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