Due on it. Bitcoin was created in

Due to its dramatic volatility and
media-coverage, Bitcoin has become easily one of the most discussed financial
topics of 2017. Many young investors are hoping that they can become rich quick
through this form of crypto currency. However, most of the people investing in
Bitcoin actually have no idea how it works. The system and design behind Bitcoin
is very complex, and while some of the Bitcoin investor success stories may be
enticing, I would urge everyone to take a closer look before betting everything
on it.

Bitcoin was created in 2008 as a
way to process online transactions and to send payments without the need for a
middleman. It is a decentralized form of financial transactions that removes
the need for a bank or other third party. Bitcoin is just one of many different
forms of crypto currencies that exist today. A lot of the excitement is due to
the fact that Bitcoin has been very volatile, and the price of one Bitcoin can
dramatically change within minutes. In April of this year, one Bitcoin would
have cost you $1,067. As of today, the current price of one bitcoin is a
whopping $17,650.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

The difficult part about
implementing an online digital payment system is making sure that nobody is
spending the same money more than one time. Before Bitcoin, this could only be done
through using a third party such as PayPal to verify transactions. Bitcoin is
able to cross-reference all transactions using its giant peer-to-peer network
to verify transactions. This system creates non-reversible payments, and results
in much lower transaction fees. The purpose and idea behind Bitcoin is very
good, however as an investment, there is more risk than I believe people
understand. People hear stories of Bitcoin investors making millions of
dollars, and fall under the false-assumption that they too can make a fortune
by jumping onto the crypto-currency craze. However, there is actually quite a
lot of uncertainty. As you take a closer look into the new currency, this risk
and uncertainty becomes increasingly more visible.  

Bitcoin utilizes a technology
called blockchain. Blockchain is essentially an open record that is able to
record transactions between parties efficiently, and in a certifiable and
permanent way. Blockchain’s are designed to be very secure and not easily
manipulated. It is a core component of Bitcoin as it is used to create the
public record of all bitcoin transactions. This technology is what allowed
Bitcoin to solve the double-spending problem without the need of a centralized
authority or server. Before Blockchain, it was impossible to determine whether
or not digital currency had any real value because the same money could be used
twice. This technology is what has allowed Bitcoin to be such a success, and
has led to many other similar crypto-currencies since such as Ethereum,
Litecoin, Ripple, and Dash. All of these currencies utilize and rely on
Blockchain to record transactions and to verify payments.

The first issue with Bitcoin as an
investment is that it is new. This means that unlike typical investments in
stocks or bonds, there is no historical data available for this crypto
currency. This means that is nearly impossible to come up with any sort of
expected return beyond guessing. Even if you determine that it is a smart
investment, you are also then forced to invest in no-name exchanges. These
platforms have proven to be unsafe and easily susceptible to hackers. In
February of 2014, Mt. Gox, an exchange that was responsible for over 70% of all
Bitcoin transactions at the time, filed for bankruptcy. All of Mt Gox’s 850,000
BitCoin’s were lost. This added up to a whopping total of about $450 million,
all of which just vanished.

 

Another main issue is that Bitcoin
is very complex. It only exists in the Internet, and many people struggle with
the idea of it due to it not being a currency that you can physically hold in
your hand. It requires a computer, and in—depth knowledge of how the system is
structured. Due to these complicated barriers to entry as a consumer, most
investors are misinformed and are not as knowledgeable as they should be to
invest safely. There are thousands of videos on YouTube that aim to explain the
complex system that drives crypto currencies like Bitcoin. These videos have
been viewed millions of times, which go to show that everyone is confused when
it comes to Bitcoin. Once you are the owner of any number of Bitcoins, you have
to have at least somewhat of a decent understanding in computer security to
safely hold your money. It is incredibly easy to steal Bitcoins, and it is
something that happens everyday.

The animosity of Bitcoin is one of
the factors that people find most alluring. However, this anonymous payment
system also provides opportunity for many illegal activities. I had an internship
this previous summer at a company called Maersk. About halfway through, the
entire company was hacked on a global scale. Every single computer in every
single office was infected with ransom-ware. Maersk has over 90,000 employees
worldwide, so this was a very serious issue. When I turned on my computer at
work I saw the ransom message, which asked for 750 bitcoins per computer. In
the office that I was working in, there were easily over 200 computers alone.
The reason I bring this up is to show that Bitcoin has also created
opportunities for hackers with criminal intentions to do a lot of damage.
Because of the denctralized and anonymous aspect of Bitcoin, it makes room for
a lot of illegal activity to occur. Criminals and terrorists can essentially
use Bitcoin to fund their illegal activities without getting caught. The risk
here is that governments around the world may begin to start cracking down on
the crypto currency. If this becomes a big enough problem, this alone could
make prices plunge. Bitcoin, because it is a decentralized currency, provides
consumer with no protection against fraud. All transactions through bitcoin are
irreversible, and once you sell your bitcoin there is no getting it back.

The Sharpe ratio is a way of
measuring the attractiveness of an asset by dividing the total return by the
accompanied risk. This risk is measured based on the standard deviation and is
relatively simple to calculate. The Sharpe ratio for Bitcoin, no matter how you
calculate it, is very low. This is due to incredible volatility and uncertainty
of the asset. People often forget about the accompanied risk that comes with
potentially high rewards. It is important to not get distracted by these huge
increases in the price of Bitcoin. Sure, there is a chance that you could
triple your money in a day, but this is no different than gambling. The
accompanied risk is higher than investing in typical stocks and bonds. This why
many finance professionals and analysts are very hesitant to get involved in
Bitcoin.

It is also beneficial to look at
Bitcoin from an Alpha pricing perspective. Alpha measures the risk-adjusted
performance relative to an asset-pricing model. It is a measure of the active
return on an investment, and is compared to the overall returns of a market
index. Bitcoin has more than tripled in value in just the previous three
months. Overall, it has well exceeded the S performance for the past
couple years. However, looking at Bitcoin from an Alpha perspective can be
quite misleading. Bitcoin’s incredible surges in its price could be due to many
different things. It is difficult to predict the future prices and trends of
Bitcoin, so these price increases are very unstable. Alpha is a more complex
tool to measure prices and requires several assumptions. The overall Alpha is
in turn, only as good as the underlying asset pricing model. You can apply all
of these different financial models to Bitcoin, but they are all mostly
unhelpful. Bitcoin does not have any historical data, and finding the Alpha or Sharpe
Ratio does not tell you as much as it would for a typical stock. Investors and
analysts are still trying to develop a way to analyze Bitcoin. As of now, it is
mostly a guessing game and anything could happen in regard with its value.

            The other risk is that most people,
including myself, do not truly understand Bitcoin. People always are attracted
to anything that promises the chance to make money quickly with relatively no
work. However, real investing involves analyzing data and trends, and looking
at long-term projections. Bitcoin for the most part is essentially gambling.
People with no knowledge of crypto currencies are simply trying to follow what
everyone else is doing.

            A big issue with bitcoin is that the
price fluctuates so dramatically and it is overall too volatile too ever have
any real-world applications. It is known to increase over 300% within minutes,
and with the price changing so constantly there will never be a way to make
purchases with it. It is hard to imagine paying for groceries using a currency
that fluctuates in value almost every minute. By the time you finish paying,
your Bitcoin could be worth half of what it was worth just minutes before. Bitcoin’s
main purpose and goal is to be used as a currency, however it is not likely due
to the fact that it will be impossible to set prices.

            Bitcoin is clearly not a good
investment at this stage in its development. It is simply too unknown to be
able to analyze it from a complete financial perspective. Due to its short
history and volatile price movements, an investment in Bitcoin is nothing more
than a guessing game, similar to penny stocks. Even after looking at the Alpha
and Sharpe Ratio, you are still left with a lot of uncertainty as to how you
evaluate the value. I urge investors to be wary about this new currency, and to
at least spend time understanding crypto-currency before putting any money into
it. While I do not see Bitcoin as a valuable investment, I do really appreciate
the concept. I think Bitcoin is the first major step in the right direction as
to how we view and manage global currency. The potential to eliminate the need
for third-party exchanges would result in increased efficiency and reduced
costs for transactions. Because it is decentralized, it will be less likely to
be manipulated by any countries or governments. There are also only 21,000,000
bitcoins that can ever exist, so inflation would be relatively stable because,
unlike dollars or pesos, you cannot print more Bitcoin. To conclude, I would
not recommend investing in Bitcoin due to its lack of financial fundamentals
and information.