Crypto and BitCoin

Explained: BitCoin has crossed $28K in value. Should you buy it?

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Joseph Haddad
Joseph Haddad

How does a Bitcoin work?

The origin of Bitcoin is unclear, as is who founded it. A person, or a group of people, who went by the identity of Satoshi Nakamoto are said to have conceptualised an accounting system in the aftermath of the 2008 financial crisis. Nakamoto published a white paper about a peer-to-peer electronic cash system, which would “allow online payments to be sent directly from one party to another without going through a financial institution”. According to Bitcoin.org, a website originally co-owned by Nakamoto, Bitcoin from a user’s perspective is “nothing more than a mobile app or computer program that provides a personal Bitcoin wallet and allows a user to send and receive Bitcoins with them”.

Bitcoins are generally identified with a Bitcoin address, which comprises 26-35 alphanumeric characters starting with either “1” or “3”. This address, which remains anonymous, represents the destination of a Bitcoin, or a fraction. Originally, the Bitcoin was intended to provide an alternative to fiat money and become a universally accepted medium of exchange directly between two involved parties. However, after Bitcoins picked up momentum, some entities started establishing exchanges — on lines of stock exchanges — for people to buy and sell Bitcoins against fiat money such as dollars or euros or pounds. Early proponents of the cryptocurrency argued that once an exchange was established, all the strengths of a Bitcoin went away, considering a third party institution was involved once again for money to change hands.

When is the right time to buy?

As with any market, nothing is for sure.

Anyone’s guess is just about as good as anyone else’s when it comes to predicting near term Bitcoin prices.

Throughout its history, Bitcoin has generally increased in value at a very fast pace, followed by a slow, steady downfall until it stabilizes.

Use tools like our Bitcoin price chart to analyze charts and understand Bitcoin’s price history.

Our Bitcoin price chart Bitcoin is global, and therefore less affected by any single country’s financial situation or stability, good or bad.

For example, speculation about the Chinese Yuan devaluing has, in the past, caused more demand from China, which also pulled up the exchange rate on U.S. and Europe based exchanges.

We’ve also seen bull markets in Bitcoin in the United States result in large arbitrage events in markets with much less liquidity due to capital controls, such as Korea. In the case of Korea, these were known as the ‘Kimchi Premium’

As Igor Makarov and Antoinette Shoar note in Trading and Arbitrage in Cryptocurrency Markets,

The daily average price ratio between the US and Korea between December 2017 to February 2018 reached 40% for several days...We estimate that during this period a minimum of $2 billion of potential total arbitrage profits were left on the table. In contrast, the price deviations between exchanges in the same country typically do not exceed 1%, on average.

Makarov & Schoar, Economists, Harvard and MIT Getting Bitcoin into Korea to take advantage of the large premium was incredibly easy. The issue was getting your fiat out of the country after you sold.

What investment opportunity does Bitcoin present?

The first advocates of Bitcoin did not intend it to be used as an asset, but the mushrooming of exchanges turned it into one. Traditional investment experts are wary of Bitcoin as an investment. “We are not offering advisory on Bitcoin investment. I don’t see any underlying fundamental that drives its price and I think it’s mostly driven by supply and demand and on technical factors and hence we are not offering our advice. It is an alternative currency which is digital in form and one has to be careful while going for it,” said Surya Bhatia, founder of Delhi-based financial services and investment advisory firm Asset Managers.

It is important to note that the price of Bitcoin fell sharply from over $18,000 in December 2017 to around $3200 in December 2018. It then went up to over $10,000 in July 2019, then fell to around $5,500 in March 2020. It has had a sharp rally since then (see chart). Market participants say the huge volatility in the price without any major fundamental reason should make retail investors cautious.

Is there a case for Bitcoin to be regulated?

People in the investment fraternity point out that there is no underlying asset in case of Bitcoin, and the value is “fictitious”. Before investors can look at it as an asset, several things need to fall in place. If the cryptocurrency is regulated, it could result in the volatility reducing, and its acceptability and monetisation needs easing up. “You can’t recommend it to anyone as it is mostly a speculative thing as of now. No one knows why the prices crashed by 80% in 2018 and have jumped four times this year. This kind of volatile product is not for small investors,” said a top official with a financial services firm who did not wish to be named.

However, given that Bitcoin was intended to come across as a global decentralised currency, any central authority regulating it would effectively defeat that purpose.

What Should I Do If I Suspect I’ve Been Contacted By a Bitcoin Scammer?

Report them. The best way to draw attention to their scam is to report anything you suspect to be shady. While it may take a while for your case to be looked into, and you can’t rely on overworked and underfunded consumer protection agencies to follow up, it’s better than nothing.

Additionally, you can use social media to bring light to the scam, at least to those in your network.