What Went Down: Bitcoin & Cryptocurrency
So, what went down with Bitcoin these last few weeks?
From big banks to social media influencers, it seems that more and more people are lining up to ride the Bitcoin rollercoaster each second. Just a few days back, Fidelity Investments Inc., the third largest investment management company in the world, revealed plans to establish an exchange traded fund (ETF) that monitors Bitcoin prices in popular markets. These market moves suggest the importance of digital currencies in the future. However, the media has shown that cryptocurrencies are victim to market manipulation, often harming retail investors who are also susceptible to scams. Is it really a good time to enter cryptocurrency markets?
Well, it depends on your investment objectives or rather goals.
Investment decisions usually follow an analysis of an entity’s fundamentals — its financial statements, management reports, industry overview etc. However, some retail investors are beginning to ditch the fundamentals, recall our investors at r/wallstreetbets. Cryptocurrencies do not have any physical, intrinsic value, as do most fiat currencies today which are off the gold standard. But at least most people can track and “see” the value of their bills, unlike cryptocurrencies. Before delineating the pros and cons behind investing in cryptocurrency, we believe investors should understand the story behind the most prolific of them all, Bitcoin.
Created in 2008 by an entity known as Satoshi Nakomoto, Bitcoin was a decentralized digital currency without a central bank to regulate it — the first of its kind. This digital “economy” depended on a peer-to-peer network which verified actual transactions through Nakomoto’s software. In the real world, John could claim that Doe owes him 10 dollars, and the two can settle the transaction by looking at their accounts at a bank or a cash receipt. In a decentralized peer-to-peer network, anybody can make claims without financial proof. This is where blockchain comes into play. Blockchain serves as a digital general ledger by connecting or chaining transactions that have been verified by “miners” through cryptography. This chain will continue to grow from all previously verified blocks — ignoring all unfounded transactions. In a way, this chain can act like a central bank. Miners, who prove these transactions, are rewarded with Bitcoin. With the help of blockchain, Bitcoin became the driving force of the novel decentralized currency. So, that’s just the beginning. Here’s a neat graphic to show you the pros and cons of investing in Bitcoin.
ETF: An exchange traded fund is a type of investment security that tracks a stock index, such as the S&P. Unlike mutual funds which require institutional investors to pool their money together, exchange traded funds are actively traded on stock exchanges.
Fiat Currencies: Fiat currencies are the dollars you can find in your wallet. Most paper currencies are considered fiat currencies. They are backed by the government and don’t necessarily have any intrinsic value.
General Ledger: In accounting, a general ledger keeps track of the balances of financial items, often known as accounts, like cash, marketable securities, and liabilities. In the world of digital currencies, general ledgers keep track of transactions between users and their balances.