You have probably heard the term “bitcoins” at one point or another if you are into the online digital currency movement. However, do you really know what this thing is? Do you know how it works? If you think you do, keep reading. You might learn something that will help you understand the concept better.
The first point about bitcoins is that it is not a traditional currency. There is no central bank that prints this currency like there is with a regular currency. Instead, bitcoins are created through a process called “cryptography”. This cryptography is done through what is known as “peer-to-peer networking” – essentially internet networks that allow users to share information.
Just like any other currency, a bit coin has three distinct characteristics that set it apart from traditional currencies. First, it is an unstable value as well as an inflation hedge. In addition, it can be used for trade and investment without any need to rely on a central government. Finally, it cannot be printed like other currencies because it is considered a scarce asset.
The second major characteristic of bitcoins is that it has no fundamental value. Unlike gold or other commodities, the only true intrinsic value of this virtual currency is what people will pay for it in the future. This means that there are no trading market and no physical commodity that can be bought or sold to settle the value of a transaction. Thus, there is no such thing as “marks of quality” as traders usually refer to them. With that said, the only thing that affects the price movements of bitcoins is the psychology of buyers and sellers.
To make things more complicated, there are several kinds of bitcoins. In reality, each type has its own intrinsic value. For instance, we have the bitcoins for investors. These are known as the volatile type of asset, since they are not backed by any type of physical commodity. Investors usually speculate on whether the price of this asset will rise or whether it will fall. Usually, the latter is the case since investors anticipate that the prices of assets will rise over time.
On the other hand, investors who buy the bitcoins as an actual commodity are known as speculators. The reasons why they invest in this asset are the same as those who invest in other types of commodities – they expect future price movements of the commodity with respect to fundamental value. However, the process of speculation is different with the characteristic of a bubble. Speculators buy large amounts of this asset to use it as capital. Once the price rises, they sell large amounts of this asset again, capitalizing on the profit. Thus, investors who participate in speculative bubbles are not really investing in the underlying asset but are speculating on its price movements.
Another type of investor who participates in the buying and selling of the bitcoins is called a “full-service” trader. They invest in not only the underlying asset – in this case, the digital asset – but in the form of buying and selling this digital asset. Thus, for them, the methodology is not the same as the speculator. Instead, they are investing in trading the pseudo-equity as a digital asset.
So, we can see that the two types of investors who are participating in the buying and selling of the bitcoins are the ones who view the value of this asset not as an investment opportunity but as an actualization of the expectations of future inflation. If you are an investor who is looking forward to investing in the bitcoins, then it is highly recommended that you buy them as an actual commodity. This will ensure that you will be able to convert the assets into cash when the value rises. By doing this, you will avoid inflation. However, if you are just an ordinary investor looking forward to profit from the fluctuations of the value of this precious asset, then you should purchase it as a digital currency and then convert it into real money once its value has shot up. In this way, you will not risk losing your money in a bubble that never bursts.