Why the renewed interest?
Record highs reached by several cryptocurrencies recently have sparked renewed interest among investors in the controversial alternative asset class. We take another look at the digital currency phenomenon and update our assessment of the best-known cryptocurrency globally, Bitcoin.
What is a cryptocurrency?
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralised networks based on blockchain technology. A defining feature of cryptocurrencies is that they are generally not issued by any central authority. Bitcoin is the best-known cryptocurrency, but there are several other cryptocurrencies that are widely traded including Ethereum, Ripple and Litecoin - each with their own specific utility. Bitcoin was developed to facilitate decentralised anonymous payments.
What is the blockchain?
The Bitcoin blockchain is an immutable, public, distributed ledger:
What is Bitcoin?
Bitcoin is a cryptocurrency (the first decentralised, virtual currency) developed for anonymous payments made entirely independent of governments and banks. It is different to traditional "fiat" currencies in that it uses blockchain technology to keep track of the currency instead of central clearing through any one authority. For now, there is a finite number of Bitcoin in existence, being 21 million. This is also different to a traditional "fiat currency" where supply can be altered by a central bank.
Price drivers of Bitcoin
The price is driven by supply and two key demand drivers - actual application and investment demand.
Benefits and risks of Bitcoin
Bitcoin as a measure of exchange can provide protection from payment fraud and lower the chances of identity theft because it is fully digital and cannot be counterfeited or revered arbitrarily. Bitcoin makes cross-border transacting seamless and transaction fees are minimal. There is also some excitement over its potential as an alternative asset class.
However, the risks to investors are still substantial:
Closing remarks
Bitcoin is still open to much speculation and is regarded as a risky bet at current levels. The biggest issue with Bitcoin is not its utility or the importance of blockchain technology, but its valuation. It is very difficult to conceptualise and there is no consensus on an appropriate valuation technique for Bitcoin. Estimates range substantially from as high to $100 000 to as low as nil. When it comes to alternative asset classes, including cryptocurrencies, it is always wise to remember "not to bet the house" and if you are a more risk-averse investor and fearful of permanent capital loss, this is probably not the investment for you.
