Bitcoin (BTC) is a new type of digital currency, with cryptographic keys, that is decentralized on a network of computers used by users and miners from all over the world and is not controlled by a single organization or government. It is the first digital cryptocurrency that has caught public attention and is accepted by a growing number of merchants. Like other currencies, users can use the digital currency to purchase goods and services online, as well as in some physical stores that accept it as a form of payment. Forex traders can also trade Bitcoins on Bitcoin exchanges.

There are several important differences between Bitcoin and traditional currencies (for example, the US dollar):

1. Bitcoin does not have a centralized authority or clearinghouse (for example, the government, central bank, MasterCard, or Visa network). The peer-to-peer payment network is managed by users and miners from all over the world. Currency is transferred anonymously directly between users over the Internet without going through a clearinghouse. This means that the transaction fees are much lower.
2. Bitcoin is created through a process called “Bitcoin mining.” Miners around the world use mining software and computers to solve complex bitcoin algorithms and approve bitcoin transactions. They are awarded transaction fees and new Bitcoins generated by solving Bitcoin algorithms.
3. There is a limited amount of Bitcoins in circulation. According to Blockchain, there were around 12.1 million in circulation as of December 20, 2013. The difficulty of mining Bitcoins (solving algorithms) becomes more difficult as more Bitcoins are generated, and the maximum amount in circulation is capped at 21 million. The cap won’t be reached until around the year 2140. This makes Bitcoins more valuable as more people use them.
4. A public ledger called the ‘Blockchain’ records all Bitcoin transactions and shows the respective holdings of each Bitcoin owner. Anyone can access the public ledger to verify transactions. This makes the digital currency more transparent and predictable. More importantly, transparency prevents fraud and double spending of the same Bitcoins.
5. The digital currency can be acquired through Bitcoin mining or Bitcoin exchanges.
6. The digital currency is accepted by a limited number of merchants on the web and some physical retailers.
7. Bitcoin wallets (similar to PayPal accounts) are used to store Bitcoins, private keys, and public addresses, as well as to transfer Bitcoins anonymously between users.
8. Bitcoins are not insured or protected by government agencies. Therefore, they cannot be recovered if the secret keys are stolen by a hacker or if they are lost due to a faulty hard drive, or due to a Bitcoin exchange shutting down. If the secret keys are lost, the associated Bitcoins cannot be recovered and would be out of circulation. Please visit this link for frequently asked questions about Bitcoins.

I think Bitcoin will gain more public acceptance because users can remain anonymous while buying goods and services online, transaction fees are much lower than credit card payment networks; anyone can access the public ledger, which can be used to prevent fraud; the currency supply is capped at 21 million, and the payment network is operated by users and miners rather than a central authority.

However, I don’t think it’s a great investment vehicle because it’s extremely volatile and not very stable. For example, the bitcoin price grew from around $14 to a high of $1,200 this year before falling to $632 per BTC at the time of writing.

Bitcoin surged this year as investors speculated that the coin would gain greater acceptance and its price would increase. The coin plunged 50% in December because BTC China (China’s largest Bitcoin operator) announced that it could no longer accept new deposits due to government regulations. And according to Bloomberg, the Chinese central bank banned financial institutions and payment companies from handling bitcoin transactions.

Bitcoin is likely to gain greater public acceptance over time, but its price is extremely volatile and very sensitive to news, such as government regulations and restrictions, which could negatively affect the currency.

Therefore, I do not suggest that investors invest in Bitcoins unless they have been purchased at less than $10 USD per BTC because this would allow much greater margin of safety.

Otherwise, I think it’s much better to invest in stocks that have strong fundamentals, as well as great business prospects and management teams because the underlying companies have intrinsic values ​​and are more predictable.

Disclosure: Victor Liang has no positions in Bitcoins and has no plans to change his position in the next 72 hours.