Does Bitcoin Deserve Your Money?



There's a true story that illustrates both the potential risk and reward of earning a passive income. The moral of this story should be kept in mind when you're considering buying or trading bitcoin - one of the most widely adopted cryptocurrencies to date...

In 1976 a man bought 200 Berkshire Hathaway shares. (In case you didn't know, Berkshire Hathaway was acquired by Warren Buffett in the mid-1960s after he bought the majority shares in the textile company. A few years later Berkshire Hathaway, under Buffett's stewardship, expanded into the insurance industry. The last textile operations were shut down in 1985.)

Within a year of buying the 200 shares, the value of the shares doubled. The man got nervous. So he decided to sell 100 shares and used the proceeds to open a restaurant. As to the other 100 shares? Assuming he still holds them today, they'd be worth about $18,000,000 USD.

What does this have to do with bitcoin?

In 2014 there was great excitement about the consumer applications of bitcoin. This excitement was evident as the currency's value suddenly jumped from $2 to $266 between February and April. In 2015 financial sector interest in bitcoin boomed. And, in 2016, murmurs echoing doubt of bitcoin as a mainstream currency started doing the rounds, signalling that it might move to the background to underpin other financial services.

Today a bitcoin valued in the region of R11k.  The real question is whether you should invest with the aim of going long, or has the value of a bitcoin peaked? The truthful answer is that there's not a soul on earth who can guarantee one way or the other.

Bitcoin Mining

But there are thousands of individuals who believe bitcoin is here to stay, and that it will more or less retain its value into the foreseeable future. As a result bitcoin mining has spawned an industry of its own.

Bitcoin mining is the process by which bitcoins are generated. It is a decentralised process that relies on the processing power supplied by miners (using specialised hardware) who join the mining network. The processing power is used to process transactions and to secure the Bitcoin network. Although mining is one way to earn bitcoins, it should be kept in mind that bitcoins are created at a decreasing and predictable rate - until a total of 21 million bitcoins have been created.

Trading in bitcoin is a different matter: it's no different from fiat currency trading (USD, GBP, EUR, etc.) - you're simply buying one currency with another - and can therefore rely on it as a source of passive income. The same principles that apply when buying or selling currency in a forex market applies to bitcoin. As such its value is susceptible to the same market forces that determine the value of other currencies.

As exciting as the bitcoin phenomenon is the technology which underpins it: the blockchain. It's essentially a distributed online public ledger detailing Bitcoin transactions and balances. Through a peer-to-peer network and a distributed timestamping server a blockchain database is managed autonomously.

In English this means that, even when 40% (e.g 10,000) of nodes are compromised and ledger information changed, the blockchain will always revert to the information held by the other 60%.

At present a number of tech organisations, such as R3 Consortium, are implementing blockchain technology to develop new systems for banks and other financial institutions to monitor the movement of stocks and other valuables. The potential for similar innovations are already being considered in other information management applications across different industries.

To invest or not to invest...

We've previously discussed the Cashflow Quadrant. Big business owners and investors are those who earn a passive income. So too was the man who bought 200 Berkshire Hathaway shares and sold half.

Did he do the right thing?

Both wealth and passive income is about mindset. Just like the employee wants the security of a salary and benefits, so too do the wealthy and passive income earners desire some form of wealth protection. They diversify.

So should you buy bitcoins, or trade them? Should you invest in the companies working to develop commercial blockchain technology applications?

Well, if you have the capital, why not all three?