The attractions and dangers of investing in Bitcoin

The attractions and dangers of investing in Bitcoin

Cryptocurrency ·

In recent years they have gone from being a hobby for programmers to an object of speculation worth millions. Some experts are now warning that a new bubble is likely to burst

Matías Stuber

Sunday, 30 May 2021, 15:53

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Elon Musk is someone who likes to try different things, a sailor always in search of a new place to dock. The owner of Tesla also likes to appear in news headlines, and he loves creating surprises. Nobody was expecting this pioneer in electric mobility to invest 1.5 billion dollars in Bitcoin, but recently he did just that.

This was a major boost for the price of the digital currency but, in spite of an apparent boom, experts are divided about Bitcoin. Some view the cryptocurrency as a new type of digital gold, while others warn that a bubble unlike any seen before could be about to burst at any moment.

Some US investment banks have already included Bitcoin in their list of products. Others are more wary. Warren Buffet, a legend in the world of finance, didn't beat around the bush. In 2018 he called this form of currency «rat poison». Since then, the price of a Bitcoin has done nothing but increase. Who is right?

«It is a very unstable stock, tremendously volatile, which moves on a market which can be easily manipulated»

A look at the way Bitcoin has evolved shows that this cryptocurrency has nothing to do with stability. The price has plummeted several times, although it has always managed to recover. In 2020, the price rose by more than 300 per cent, to a record high of 58,000 dollars per coin in February.

It still remains to be seen whether this digital currency can establish itself as a real method of payment in the medium term. Many analysts believe that with time it will compete directly with gold, and that's why the term 'digital gold' is being heard more often in connection with Bitcoin these days.

Below, we take a look at the typical questions asked about this cryptocurrency, and what people should take into account if they decide to invest their money in it.

What is a Bitcoin?

«Most people are aware that Bitcoin is a cryptocurrency, a virtual form of money with no institutional issuing company behind it to support its value. Bitcoin is also an open source P2P network, in other words it is one of those that register their transactions in a chain of blocks, which is known as a blockchain,» says Alberto Montero, a professor of Economics at Malaga university. It is referred to as a cryptocurrency because each individual unit is subject to cryptography, in other words it is hidden.

This cryptography is done through the blockchain, which can be described as a protocol to ensure that all transactions are safeguarded from falsification. Contrary to the situation with the dollar or the euro, the issue of Bitcoin is limited to a maximum of 21 million units. This is to protect this currency from inflation. There is no central bank to monitor Bitcoin, as the BCE does with the euro, and that is why people speak of a decentralised monetary system.

Who invented Bitcoin?

The person or group behind it has not been identified. After the financial crisis of 2008, a guide was published under the pseudonym of Satoshi Nakamoto, explaining how a decentralised monetary system works. The name of the system was Bitcoin. Many people have claimed to be Satoshi Nakamoto, but none of them have been able to prove it.

Experts believe Bitcoin was created by a group of programmers.

How can I buy Bitcoin?

Through different exchange platforms, which act as a type of stock market for cryptocurrencies. «You can buy via exchange platforms. The most popular are Coinbase and Binance. You just download an application and sign up to be able to buy Bitcoin, and you can either pay through a bank transfer or using credit or debit cards,» explains Montero. Cryptocurrency can be bought and sold at any hour of the day. The majority of platforms demand a minimum investment of 25 euros, which is equivalent to about 0.0005 Bitcoins.

How and where are they stored?

The platforms from which Bitcoins are bought act as stores. «You can also keep them in private electronic wallets, which are just downloaded through an app. The choice of which method to use depends on the degree of confidence in a platform's wallet. There have been reports of some being hacked and robbed. But they are becoming more secure all the time,» says Montero. To prevent theft through hacking, the platforms and markets use double authentication, a technology which is considered very safe.

How are the Bitcoins transferred?

«Bitcoins are bought and sold through these exchange platforms. When you buy them they are deposited in a virtual wallet on your account, the equivalent to the amount of the currency you have exchanged. After that, you can give the order to sell them at any time and in return you receive the equivalent amount in euros which you can transfer to your current account or credit card,» says Montero.

Who issues them, and where?

Bitcoins are created via a process called mining. Very powerful computers validate transactions within the Bitcoin network. For every transfer you do, you pay a certain percentage to the people who do this mining. It's a way of enticing people to do this work and to ensure that the system keeps running and doesn't collapse.

What are the arguments in favour of investing in Bitcoin?

Montero recommends caution: «There are very few arguments in favour. It is a very unstable stock, tremendously volatile, which moves on a market which can be easily manipulated by those with large Bitcoin holdings. You also need certain technical knowledge in order to be able to interpret the trends. It is not a market within reach of everybody, and nor is it recommended as a method of saving.»

The supporters of Bitcoin see cryptocurrency as a type of digital gold. The total issue is limited to 21 million Bitcoins and those who defend the digital currency say this ensures that it is not subject to inflation.

What are the risks of this type of investment?

«Basically, losing a large part of your investment through a lack of knowledge of the market and not knowing how to interpret its dynamics. It is a very risky and volatile stock. Anyone who enters this market needs to be aware that their investment can easily become volatile. If you simply hold on to the Bitcoins for a while, the risks reduce. If you try trading, buying and selling in the very short term, the risk factor is exponential,» says Moreno.

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