Cryptocurrencies like Bitcoin have been around for over a decade. People have made money and lost money on them, used them to pay for things in the real world and had them stolen by hackers. Bitcoin in particular has experienced a resurgence in popularity recently, but before you jump on the Bitcoin bandwagon, let’s take a closer look at what it really is.
What is Bitcoin?
Bitcoin is not a physical currency, it’s a virtual currency, which you keep in a virtual wallet, on a virtual exchange, and use to buy things on the internet. It has no central bank or country designation. Transactions are recorded as an encrypted string of data blocks on a transparent public ledger called a blockchain.
The person or group of people that founded Bitcoin is still unknown. They use the name ‘Satoshi Nakamoto’ but nobody knows who, or where, they are. The reality is, anyone can create a cryptocurrency.
How is Bitcoin valued?
Unlike other investments, a Bitcoin has no underlying asset and therefore no intrinsic value. The value of a Bitcoin is based on pure speculation; its worth is what people are willing to pay for it and what they think it could be worth in the market at some point in the future. There is no real basis for placing any particular value on a Bitcoin, or any cryptocurrency.
You may think that the underlying blockchain technology has value, however blockchain is open source software, which means anyone can see the code, copy it, or use it. So it’s hard to see where the value is.
Investment or gamble?
Cryptocurrencies were developed as an alternate payment system to traditional currencies, but they are not regulated, are not legal tender and are not widely accepted. Instead, people are buying cryptocurrencies, such as Bitcoin, as a speculative investment.
Some might say that if you buy something you expect to increase in value and provide you with a profit, it can be classified as an investment. However, if there is no real underlying asset, nothing that will generate an income, and the price is subject to dramatic price swings at the drop of a hat for no logical reason, does that seem like a sound investment, or does it sound more like a gamble?
Crypto scams are on the rise. According to the Australian Securities and Investments Commission (ASIC), during COVID-19, reports from consumers who have lost money in a cryptocurrency scam are up by 20%, read more about how crypto scams work here.
Never speculate (gamble) with more money than you are prepared to lose.
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