An Introduction to Bitcoin

Bitcoin- a word that has caught the attention of so many in the past few years and is somewhat of a mystery to the vast majority. What is crypto and what is bitcoin is something that can be easily read and understood from multiple sources on the internet?

To understand the technology behind it one needs to get into the basics of what is Blockchain. Here is a simple and popular video that explains Bitcoin

 

““Cryptocurrency is promising, but please invest with caution”!”

Elon Musk

The technology is disruptive to the say the least but is growing in adoption big time and has several benefits. Just like most people who buy stocks do not really understand reading balance sheets, and profit/loss statements and never bother to understand terms like ROCE, P/E, P/BV, etc, most people will not take the time and the effort to really understand the technology that is behind cryptocurrencies.

My goal here is not to educate people about the underlying tech as that is better done by people who are experts in this and have posted ample information for anyone to access.

I will like to cover some of the aspects at a high level, which a layman like me had to understand before getting into putting money there.

1. Unregulated hence HIGH RISK: This space is NOT regulated. What does it mean?
   Like we have SEBI in India which monitors and has processes in place to stop manipulation in stock markets, the crypto market is not under the control of any government body or agencies. The idea of decentralization (which is the base of bitcoin and most of the crypto) is to give people control of their money and not be controlled by the government and any banks etc. This means the risk of putting money there is HIGH and someone has to be very careful and do their own studies before investing or trading.
2. Highly Volatile: Crypto markets are far more volatile than the stock markets, so the risks also are high plus the rewards too. A stock can probably fall or rise 20% in a day depending on what’s its daily limit but a cryptocurrency has no such limit including Bitcoin. That said Bitcoin is the BIGGEST and the oldest cryptocurrency and implements decentralization in the true sense. Its volatility is lesser as such compared to the smaller coins, also referred to as altcoins.
3. Not a GET RICH QUICK SCHEME: A lot of people are lured into this hearing the astronomical returns people got from Bitcoin over the last few years and more so from some small, unknown coin that went parabolic. These stories are nice to hear but then one has to understand who really made money there?

There are more than 10,000 projects in the crypto space now, each represented by a coin which is basically a digital unit you hold in the project. This is similar to a share you hold as ownership in a company, just that here the company is a digital project trying to create a value or solve a problem in the space.

Most of these are not creating much value, a large number of them are similar to money chain schemes which attract a lot of people who are just plain and simple, greedy. Some few people make money, purely out of luck in these and feed the stories to the vast majority about how they can also get rich quickly. Most lose money and the cycle keeps going on.

The ones who do some research and invest, need to wait and like other investments may get good returns, far better than traditional instruments out there. That said, all investments are risky since, in reality, you are putting money into a technology that “may” see the light of the day. Putting money into bitcoin is a little different as it’s been around for years and is actually seen as a store of value that will beat inflation as the supply is limited. Once the adoption grows and more people demand it, the limited supply could push the price up further, similar to a commodity that has limited supply.

There is however a large section of traders, who enjoy and embrace the volatility and hence aim to make gains every day in this space, that needs skills which is not the topic to be covered here.