The technology behind Bitcoin, Blockchain, is fascinating and a game changer. Blockchain is a way to assign value electronically. Whether it is cash, oil, electricity, stocks, bonds or even votes, the Blockchain technology is a safe and secure way to conduct transactions. Another way to think of Blockchain is a community where everyone agrees to rules setup in the code. Users are free to join or leave. There is no central authority, only the rules set forth by the code. Blockchain creates a history of all transactions which all the users agree is correct. Without digging into the technology, it is very difficult for one party to defraud everyone else.
A good example of an industry that could utilize Blockchain is electricity. Assume that solar panels on houses are common and owners can sell power to the grid at various prices. A Blockchain could keep track of who is selling power, when the power is used and the price paid. Solar panel owners would be free to sell or not sell at whatever price they choose. The rules of transactions would be written in the software and Blockchain would create a history of transactions that all the users would agree is correct.
It is impossible to determine what bitcoin is worth. Really it is worth whatever someone else is willing to pay. Bitcoin’s value has risen dramatically and has shown massive volatility and even greater speculation.
Pros
• Decentralized currency: In countries like Venezuela, Bitcoin is probably safer from inflation than currency back by local government. Financial crisis like 2008 could weaken faith in fiat currency and spur usage of cryptocurrencies.
• People have made easy profits as the price has skyrocketed attracting more buyers
• Not easily tracked by US Government for tax purposes
• Enthusiasm for Blockchain technology has spilled into Bitcoin
Cons
• No real value – what someone else will pay
• It’s a bubble! (we will know for certain as time passes, but it walks, talks and smells like a bubble)
• Not regulated and at some point will face regulation. I would argue that once they ‘figure out’ the regulation, crypto currencies have the potential to become more mainstream. However, that may not favor Bitcoin.
• New technology. It is very promising, but there have been and will be scams and fraud as the technology goes mainstream.
• US Government may obtain transaction record and require taxes be paid. Currently, IRS has a law suit with coinbase.
• If cryptocurrencies go mainstream, it is likely that another coin will become more popular than Bitcoin as the bitcoin network is not setup for mass transactions.
• Infrastructure around conducting day-to-day transactions in cryptocurrency are emerging and not fully developed.
These comments are scratching the surface of a complex and fascinating topic. Investors should strive to learn as much as possible about this new technology. A good place to start are these blogs http://investorfieldguide.com/hashpower/. Investors need to be careful and prudent with any investment in Bitcoin or other cryptocurrencies.