Why you should use Bitcoin for investment purposes but not as a payment method?
Bitcoin is for investment. Table of Contents
Things you should know about Bitcoin today
In the past year, Bitcoin’s popularity has reached a frenetic level, and given its amazing growth in value, Bitcoin has received unprecedented attention.
Cryptocurrency has become an overhyped concept.
Many people only promote the benefits of Bitcoin as a phenomenon that has the potential to shape the future of finance.
Before making a clear conclusion on the beneficial degree of Bitcoin, I think it is very useful to take a critical approach when examining Bitcoin as financial technology innovation and investment asset, and its pros and cons should be considered at the same time.
Below I will outline some of the intricacies of Bitcoin from the perspective of financial technology.
1. The production process is very slow
Encryption currency is closely related to blockchain, which is based on user-supported general ledger recording technology without a central management agency. Transactions are verified on a computer network distributed around the world, which makes manipulation difficult.
But the nature of blockchain technology requires sacrificing some speed and resources, which makes the production process of Bitcoin very slow. In addition, bitcoin mining requires a lot of resources. The energy required to produce 1 bitcoin is equivalent to the production of 10.1 barrels of oil (according to the report of SRSrocco, the energy required to produce 1 bitcoin is more than 7 times that of producing 1 ounce of gold. An ounce of gold is equivalent to the energy required to produce 1.4 barrels of oil).
2. Slow transaction processing
Currently, Bitcoin transactions are much slower than banks that process credit card transactions. Visa processes 150 million transactions per day, an average of about 1,700 transactions per second, while the Bitcoin network processes 7 transactions per second. This shows that, as an efficient payment system, the potential of Bitcoin has declined because it cannot compete with other mainstream payment systems.
The transaction takes about 10 minutes to process, and as the Bitcoin user network grows, the waiting time will increase, because there will be more transactions that need to be processed without changing the basic technology for processing these transactions. Two main solutions can be used to increase the speed of the transaction verification process: or make the amount of data that needs to be verified in each block smaller, thereby making the transaction faster and cheaper; or making the data block larger So that more information can be processed at one time. However, it is almost impossible for a decentralized system to solve this problem.
3. Bitcoin supply is limited
In fact, only 21 million bitcoins can be mined in total. This means that the supply of Bitcoin is limited and will end in the near future unless the Bitcoin protocol is modified to allow a larger supply. The current supply is about 16 million or more. So, all Bitcoin mining farms consume a lot of energy just to support the agreement. What are the benefits? As we all know, Bitcoin’s transaction costs are close to zero; what’s interesting is that these costs can’t actually support the Bitcoin network. Increasing transaction costs is certainly not a viable option, because it is not what people expect at all.
After carefully studying some of the key technical characteristics of Bitcoin, let us explore several other important aspects of Bitcoin, which every cryptocurrency investor should understand:
4. Bitcoin is highly volatile
There is no doubt that 2017 was the year with the largest increase in the price of Bitcoin, which surged from $1,000 to just under $20,000, and fell to around $13,000 at the end of the year. Financial experts agree that Bitcoin will suddenly experience price fluctuations in a short period of time. Over time, cryptocurrencies are likely to lose a certain amount of volatility. However, creating a diversified investment portfolio and following a sound risk management plan may be an ideal choice for cryptocurrency traders.
5. Legality issues
As Bitcoin continues to become mainstream, its popularity has grown exponentially. However, given that Bitcoin’s popularity and market value have affected the valuation of fiat currencies, many governments have taken drastic measures, including a total ban on Bitcoin transactions. In general, global regulators still do not fully understand the potential of cryptocurrency and the technology behind it. This may be the reason why some governments have not yet introduced regulations applicable to the use of Bitcoin.
6. The psychological background of pricing
It is wrong to think that the value of Bitcoin will always rise. As a relatively new market, there is no proven mechanism to predict future trends. Investors should be cautious because it is affected by factors that are difficult to control, including adoption rates, negative news, political uncertainty, and regulatory stances. As with any uncertain speculation, it is wise to only invest where you can afford to lose money.
In short, Bitcoin has attracted the attention of financial speculators and established itself as a legal currency alternative investment. There is a demand for Bitcoin; however, it is still too early to predict whether Bitcoin is a revolutionary innovation or just another speculative boom. Before trading Bitcoin, you must consider your personal circumstances, such as your experience level, portfolio composition and risk appetite, and determine whether it is a suitable investment for you. There is no doubt that implementing appropriate risk management is the best way to control transaction risks.