Bitcoin is receiving a lot of attention and has many people trying to understand if it is a good investment, and if so, what type of investment software can be used to manage it.

What is bitcoin?

Bitcoin is a digital currency consisting of tokens that can be exchanged between individuals within an online ledger. Its advantages are that it is secure and fast. It is not controlled or owned by a central body, rather it is processed by blockchain which is a worldwide software network.

How does it work?

There are a set of rules which are the basis for the operation of the blockchain network.

  • A maximum number of 21 million bitcoins can ever exist.
  • Each bitcoin can be broken down into 8 decimals points, allowing for a smaller unit than one bitcoin to be purchased.
  • Transactions are verified multiple times to make sure fraudulent transactions do not occur.

Where does bitcoin fit?

There has been much debate over the asset class for bitcoin but it is not straightforward to answer as previous digital currencies were controlled by a third party and were typically pegged to a currency value. The overriding consensus is that bitcoin is an asset class in its own right.

Should I invest in bitcoin?

There are plenty of people that regard bitcoin to be an attractive investment – but there are also many investors who are more hesitant. Let us start with the main reasons to invest:

  • There is a finite supply. There can never be more than 21 million bitcoins. This prevents the market being flooded.
  • Bitcoins are secure, quick and easy to trade which many argue will make the demand for them increase.
  • Bitcoins sit outside of the traditional financial system and therefore many investors regard it as an opportunity to diversify their investment portfolio. It is protected at least for the foreseeable future from government intervention.

As with all investment opportunities, there are reservations levied against investing in bitcoin:

  • Whilst there have been many studies to check the security of the blockchain network, there remains the possibility of a hidden flaw that is hackable. An attack could reduce the market cap to zero. Research suggests this is highly unlikely, but not impossible.
  • To hold bitcoins you need a private key and protecting that key does require a level of technical skill and cost.
  • Bitcoin is volatile and pricing fluctuates significantly. There have been examples of price shifting more than 50% in one day. Many investors find this volatility unpalatable.
  • Bitcoin is volatile and pricing fluctuates significantly. There have been examples of price shifting more than 50% in one day. Many investors find this volatility unpalatable.

Risks -In summary

Bitcoin will continue to be of interest to investors and whilst there are notable risks, as there are with any investment option, there are a number of benefits that make this a good buy option for a diversified portfolio.