Ok I'm not going to talk in detail about what is Bitcoin.
I'll give a light summary.
Bitcoin is a virtual currency. Someone created this program or system. No one knows who. Satoshi Nakamoto but this is an alias. So no one really knows the exact person.
When you run the program, it's like an accounting ledger. It tracks the transactions of EVERYONE using it. So if there are 10 accounts on the Bitcoin system, everyone can see everyone's balance. But you don't know who owns the account. This is good cos it's hard to hack. Cos even if you hack one system, there are 9 other folks who have the correct records.
So how are Bitcoins created. Bitcoins are "mined". That's just the term.
So some users "person C" can contribute to the system by processing payments. So Person C can keep his computer on and when person A wants to pay person B, person C's computer will generate random numbers to "unlock" the transaction. I don't want to go into detail of this process. It's highly technical.
Anyway, person C's computer will try to "unlock" the transaction so that the Bitcoins from person A goes to person B. And this transaction will be sent to all the other 7 users to record.
So one transaction has taken place, person A has paid person B, and everyone knows about it. For performing the transaction, person C gets some Bitcoin as something like a "service charge". That's how Bitcoins are mined now. The new Bitcoins are created by the system. So it's literally, created out of thin air.
Bitcoins are limited in number. There will be a total end number of Bitcoins in future. When all the Bitcoins have been mined, then the person processing the transaction will get a % of the transacted value of Bitcoin.
So quick summary at this point. Bitcoins are created by mining. The person helping to process the transaction will get a very small amount of Bitcoin for allowing the system to use their computing power. The system tracks all the transactions so everyone has a record of everyone's balance. This keeps things secure cos it's hard to corrupt everyone's system.
The Bitcoin program is open source so anyone can edit it. But there are large communities looking through the changes in code so you can't slip in hacked codes and hope that people will incorporate that in the system and start using a corrupted program.
You can trade Bitcoins in fractions of a coin so you can theoretically use it to pay for your wonton mee downstairs.
There are large companies with thousands computers set up with special chips for the purpose of Bitcoin mining. It's not as easy as you think. It takes a lot of electrical power to process the Bitcoin transaction so it's not as simple as just keeping your computer on. It used to be easy when Bitcoin first started. But now, people are using specialized chips to mine Bitcoin.
Ok enough for the intro.
So WHY does Bitcoin have value?
It's created out of nothing. There's no physical asset. It's not like gold
Simply put... it's the same as Facebook. Facebook is nothing but a website. And yet it has value.
Why does Facebook have value? It provides a service.
Bitcoin provides a service.
It provides an anonymous way to pay, this is good for money laundering and illegal activities.
It provides a secure and unhackable way to pay and this is good for everyone.
Same as gold or diamonds. The true use is minimal. But people trust the "value" of gold. It is used as a medium of exchange.
So as more people on-board Bitcoin, Bitcoin will have more value. The more it is accepted by mainstream users, the more value it will have cos there is more trust in it. Cos someone else is willing to accept the Bitcoin as payment so you can transfer "value" around and transact using Bitcoin.
There are of course issues with Bitcoin.
It is a virtual currency. It is not the ONLY virtual currency. There are other virtual currencies available for use. So if trust is broken for Bitcoin, people can just shift to other forms of virtual currency.
Bitcoin is not like gold. Gold is gold. There is no other gold. Well actually there is platinum or diamonds, etc. So if one day, some scientist finds a method to create gold, gold will lose it's value and people will shift to other forms of assets to transact. The trust is lost cos someone has access to an unlimited supply of it.
This is the same as any currency. If any government starts printing money, then the currency will be valueless very much like banana money. Cos there is trust in the government that they will not increase the supply of money indiscriminately. So it's not like real USD or SGD is immune to this issue.
That's it. So why does Bitcoin have value?
Cos it provides a service of secure payments to others and a perceived retention of value. The more people use it, the more value it will have.
Would I invest in it now? Personally probably not. I've been looking at it since it was around USD400.
Any regrets, no not really. Why?
Cos I look at what Warren Buffet says and I think it's true.
I'll give a light summary.
Bitcoin is a virtual currency. Someone created this program or system. No one knows who. Satoshi Nakamoto but this is an alias. So no one really knows the exact person.
When you run the program, it's like an accounting ledger. It tracks the transactions of EVERYONE using it. So if there are 10 accounts on the Bitcoin system, everyone can see everyone's balance. But you don't know who owns the account. This is good cos it's hard to hack. Cos even if you hack one system, there are 9 other folks who have the correct records.
So how are Bitcoins created. Bitcoins are "mined". That's just the term.
So some users "person C" can contribute to the system by processing payments. So Person C can keep his computer on and when person A wants to pay person B, person C's computer will generate random numbers to "unlock" the transaction. I don't want to go into detail of this process. It's highly technical.
Anyway, person C's computer will try to "unlock" the transaction so that the Bitcoins from person A goes to person B. And this transaction will be sent to all the other 7 users to record.
So one transaction has taken place, person A has paid person B, and everyone knows about it. For performing the transaction, person C gets some Bitcoin as something like a "service charge". That's how Bitcoins are mined now. The new Bitcoins are created by the system. So it's literally, created out of thin air.
Bitcoins are limited in number. There will be a total end number of Bitcoins in future. When all the Bitcoins have been mined, then the person processing the transaction will get a % of the transacted value of Bitcoin.
So quick summary at this point. Bitcoins are created by mining. The person helping to process the transaction will get a very small amount of Bitcoin for allowing the system to use their computing power. The system tracks all the transactions so everyone has a record of everyone's balance. This keeps things secure cos it's hard to corrupt everyone's system.
The Bitcoin program is open source so anyone can edit it. But there are large communities looking through the changes in code so you can't slip in hacked codes and hope that people will incorporate that in the system and start using a corrupted program.
You can trade Bitcoins in fractions of a coin so you can theoretically use it to pay for your wonton mee downstairs.
There are large companies with thousands computers set up with special chips for the purpose of Bitcoin mining. It's not as easy as you think. It takes a lot of electrical power to process the Bitcoin transaction so it's not as simple as just keeping your computer on. It used to be easy when Bitcoin first started. But now, people are using specialized chips to mine Bitcoin.
Ok enough for the intro.
So WHY does Bitcoin have value?
It's created out of nothing. There's no physical asset. It's not like gold
Simply put... it's the same as Facebook. Facebook is nothing but a website. And yet it has value.
Why does Facebook have value? It provides a service.
Bitcoin provides a service.
It provides an anonymous way to pay, this is good for money laundering and illegal activities.
It provides a secure and unhackable way to pay and this is good for everyone.
Same as gold or diamonds. The true use is minimal. But people trust the "value" of gold. It is used as a medium of exchange.
So as more people on-board Bitcoin, Bitcoin will have more value. The more it is accepted by mainstream users, the more value it will have cos there is more trust in it. Cos someone else is willing to accept the Bitcoin as payment so you can transfer "value" around and transact using Bitcoin.
There are of course issues with Bitcoin.
It is a virtual currency. It is not the ONLY virtual currency. There are other virtual currencies available for use. So if trust is broken for Bitcoin, people can just shift to other forms of virtual currency.
Bitcoin is not like gold. Gold is gold. There is no other gold. Well actually there is platinum or diamonds, etc. So if one day, some scientist finds a method to create gold, gold will lose it's value and people will shift to other forms of assets to transact. The trust is lost cos someone has access to an unlimited supply of it.
This is the same as any currency. If any government starts printing money, then the currency will be valueless very much like banana money. Cos there is trust in the government that they will not increase the supply of money indiscriminately. So it's not like real USD or SGD is immune to this issue.
That's it. So why does Bitcoin have value?
Cos it provides a service of secure payments to others and a perceived retention of value. The more people use it, the more value it will have.
Would I invest in it now? Personally probably not. I've been looking at it since it was around USD400.
Any regrets, no not really. Why?
Cos I look at what Warren Buffet says and I think it's true.
“(Gold) gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
“You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what it’s worth at current gold prices, you could buy — not some — all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils (XOM), plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?”
“I have no views as to where it will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas, you know, Coca-Cola (KO) will be making money, and I think Wells Fargo (WFC) will be making a lot of money, and there will be a lot — and it’s a lot — it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that."
--- Warren Buffett
Basically, I think Gold, Bitcoin, whatever, these are currencies, they are used to store value.
They aren't creating value.
Most people don't invest in USD by just buying USD. Well some do and put it in deposits.
But generally, I don't know of people who said I've invested in foreign currencies and hold a diversified portfolio of currencies. I hold USD, MYR, JPY, CHF, EUR, etc.
Most people will buy USD and use the money to buy Facebook or Microsoft or whatever.
So anyway that's my position on Bitcoin. I don't look at it as an investment. I look at it as a currency.
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