Did Someone Say Bitcoin?

Cryptocurrency is one of the hottest topics on the market right now.

Recently, we’ve had many individuals express their curiosity with investing in a Cryptocurrency known as bitcoin. There are those who believe your brain has gone missing by not partaking in the investment, and those who feel like they’re playing a game of Russian roulette and would rather not pull the trigger. Not familiar with this type of investment? Let’s break down the basics of bitcoin:

BACKGROUND

The concept of bitcoin was first introduced in 2008 by an unknown individual, using the alias “Satoshi Nakamoto”. In October of 2008, Nakamoto published a paper describing the bitcoin digital currency, and in January of 2009 he released the first bitcoin software that launched the network and the first units of bitcoin. Nakamoto left the project in late 2010 without revealing much about his true identity. The bitcoin community has since grown exponentially with many developers working on the concept. Although there has been much speculation on who Satoshi Nakamoto really is, his true identity has never been discovered.

Knock, Knock.

Who’s there?

Satoshi Nakamoto.

Satoshi Nakamoto who?

You will never know.

BITCOINS

Bitcoins are decentralized, purely digital virtual coins exchanged directly between two parties online with no middle man. They are pieces of computer code, in better terms mathematical algorithms, that represent monetary units. Bitcoins are not controlled or backed by any bank or central government authority (i.e. the Federal Reserve). They can be lost, stolen or misplaced, but never destroyed.

Bitcoins are not anonymous and they are traceable. However, users don’t have to provide specific sources of identifying information such as their bank account, social security number or physical addresses. Each transaction leaves behind a traceable path which is stored in a public log known as the blockchain. This public record prevents people from spending the same bitcoins more than once. There are only 21 million bitcoins that can be mined in total, mining at the rate of 25 bitcoins/10 minutes with the number of bitcoin halving every four years. The last bitcoin is expected to be mined by the year 2140.

MINING

Miners are the backbone of the bitcoin network and without them the network would collapse, losing all value. Mining is coined as processing every bitcoin transaction in the digital currency system and securing the network. This is accomplished by solving a calculated problem which allows miners to chain together blocks of transactions; establishing the blockchain.

BLOCKCHAIN & THE TECHNOLOGY BEHIND IT

Bitcoin was built on a foundation called the blockchain. It can be defined as a digitized, decentralized, public ledger of all cryptocurrency transactions. The chain is constantly growing as completed blocks, otherwise known as most recent transactions. All transactions are recorded and added to the chain in chronological order, allowing market participants to keep track of transactions without central recordkeeping.

Don and Alex Tapscott, authors of Blockchain Revolution state that, “The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.” They refer to the chain as incorruptible because “altering any unit of information on the chain would include a huge amount of computing power to override the entire network”. Fundamentally, blockchain is a public network that checks in with itself and reconciles every transaction that happens in ten-minute intervals.

PURCHASING BITCOINS

Bitcoins are purchased online using real equivalent money through bitcoin exchanges and private sellers. There are various methods to choose from, but some of the most popular bitcoin exchanges today are Bitstamp and Coinbase.

BITCOIN IN ACTION

John wants to purchase a product from Jane. The charge for John in bitcoin is 1.8 BTC. John makes a transaction of 1.8 BTC to Jane. The transaction is published and broadcasted on the blockchain. For verification, miners have to give the approval. Once approved, the miner(s) receives a specific amount of bitcoin as a reward for their service and Jane receives her payment of 1.8 BTC.

Now that you know the basics, are you ready to invest? Maybe I should briefly summarize a few arguments for the advantages and disadvantages of bitcoin before you press the gas.

BITCOIN ADVANTAGES

Payment Freedom

  • You can send and receive money anywhere in the world at any given time.

  • There are no worries with rescheduling for bank holidays, crossing borders or other limitations.

You are in control as there is no central authority in the bitcoin network.

Fewer Risks for Merchants

  • Transactions cannot be reversed, do not carry personal information, and are secure, making merchants protected from potential losses that might occur from fraud.

  • Due to the public ledger, merchants are able to do business where crime and fraud rates may be high because it’s very hard to swindle or scam anyone in bitcoin.

     

Security and Control

  • The users are in control.

  • Merchants must talk with the consumer before adding any charge – everything is noticed.

  • Payments can be made and confirmed without one’s personal information tied to the transaction, preventing identity theft.

  • Bitcoin can be backed up and encrypted to ensure the safety of your money.

Transparent and Neutral

  • All finalized transactions are available for everyone to see, however others can only see your public address, not personal information.

  • Transactions can be verified at any time in the bitcoin block chain.

  • Bitcoin is cryptographically secure, meaning it cannot be manipulated by anyone.

DISADVANTAGES

Lack of Awareness & Understanding

  • Many individuals are still unaware of digital currencies.

  • Bitcoin education is lacking and many don’t understand how to apply it to their lives.

  • Larger companies are accepting bitcoin even though their staff doesn’t comprehend what digital currencies are, creating disconnect with the customer service department.

Volatility

  • There is a limited supply of coins and the demand increases each day.

  • The number of businesses using bitcoin is still very small, which consequently makes any fairly small event, trade or business activity considerably affect the price.

Ongoing Development

  • Bitcoin is still at its infancy stage with features still in development.

  • Most businesses using bitcoin are new and still offer no insurance.

  • New features, tools, and services are currently being developed to increase security and become more accessible.

Now that you have some of the basics and both sides of the coin, you can see that as with most things, it’s not perfect. As always, the key to making any good decision is to do your research and identify the objective or outcome you want to achieve. Here are some additional resources and opinions you may find interesting when doing your homework.

https://www.cnbc.com/video/2017/12/07/bitcoin-could-be-the-biggest-bubble-in-history--heres-how.html

“Many signs and skeptics say bitcoin is a bubble. Its rise is drawing a lot of similarity to others, most notable ‘Tulip Mania’.”

https://www.cnbc.com/2017/12/07/should-you-buy-into-bitcoin-heres-what-top-investors-say.html

"Bitcoin has no underlying rate of return," Bogle continued. "You know bonds have an interest coupon, stocks have earnings and dividends, gold has nothing. There is nothing to support bitcoin except the hope that you will sell it to someone for more than you paid for it."

https://www.bloomberg.com/news/articles/2017-11-21/bitcoin-mania-hits-main-street-as-client-calls-bombard-advisers

“Right now you’re not only speculating that people will continue to pay more for bitcoin in the future, based on no reason tied to intrinsic value,” said Michael Kitces, a partner at Pinnacle Advisory Group in Columbia, Maryland, which manages more than $1.8 billion. “You’re also gambling that bitcoin is the one that survives in a blockchain future. And that assumes no one finds some magic flaw in blockchain that makes it unravel.”

https://www.fool.com/investing/2017/08/11/so-you-want-to-invest-in-bitcoin-heres-what-you-sh.aspx

“…within a few years, bitcoin could fall anywhere -- from being known as a worthless experiment, to being the greatest disruptive force the financial industry has ever seen. If I knew investors who wanted to purchase a small, speculative position in bitcoin, I wouldn't try to talk them out of it. However -- and I cannot stress this enough -- nothing should be invested in bitcoin currency that an investor isn't comfortable losing.”

JUST FOR FUN

Learn more about the Bitcoin revolution

 

Original 9-page Paper on Bitcoin

https://bitcoin.org/bitcoin.pdf

Bitcoin to US Dollar Converter:

https://currencio.co/btc/usd/

With popular trends such as bitcoin, the fear of missing out can bring fourth our alter ego and make us do things we typically wouldn’t. Although bitcoin may be the hot topic, ask yourself if it’s the right investment for you?

If you have any questions or would like to discuss this in further detail, our advisors are always happy to help.

 

Legal Information and Disclosures

This memorandum expresses the views of the author as of the date indicated and such views are subject to change without notice. HFG Trust has no duty or obligation to update the information contained herein. Further, HFG Trust makes no representation, and it should not be assumed that past investment performance is an indication of future results. Moreover, wherever there is potential profit there is the possibility of loss. This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicit and securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. HFG Trust believes that the sources from which such information has be obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. This memorandum, included the information contained herein, may not be coped, reproduced, republished, or posted in any form without the prior written consent of HFG Trust.

 

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