Money 2.0, a huge huge deal!


Globalisation, innovation and technology have not only changed the way people live but also impacted consumer trends. Consumers now have new tastes, are more mobile than ever and are targeting new markets and asset classes. Increased mobility and new technological trends are demanding that consumers be in full control of their money and have a good degree of payment freedom. In our view, a digital currency such as Bitcoin will soon become more appealing not only to the high net worth individuals (HNWIs) but also to an emerging generation of tech-savvy individuals. Bitcoin exists outside the institutional banking system and the control of governments. It is possible to send and receive any amount of money instantly anywhere in the world at any time. There are no bank holidays, no borders and no imposed limits when it comes to Bitcoin. It is worth evaluating Bitcoin as an emerging digital currency from two perspectives; (i) Bitcoin as a payment system and (ii) Bitcoin as an investment asset.

Bitcoin as a payment system

Bitcoin is a form of cryptocurrency or digital currency that facilitates both a secure, decentralized payment system and a tool for the storage, verification and auditing of information, including digital representations of value. The unit of account of the Bitcoin system is bitcoin. The symbols used to represent Bitcoin include BTC and XBT. Small amounts of Bitcoin used as alternative units are millibitcoin (mBTC), microbitcoin (µBTC, sometimes referred to as bit), and satoshi (named after Bitcoin’s creator). A satoshi is the smallest amount within Bitcoin representing 0.00000001 bitcoin, one hundred millionth of a bitcoin. Bitcoin was introduced on 31 October 2008 to a cryptography mailing list and released as open-source software in 2009.

Satoshi Nakamoto, a software developer proposed Bitcoin as an electronic payment system that is based on mathematical proof. The idea was premised on creating a currency independent of any central authority and that is transferable electronically, more or less instantly, with very low transaction fees. The system is peer-to-peer and transactions take place between users directly, without an intermediary. These transactions are verified by network nodes and recorded in a public distributed ledger called the blockchain, which uses bitcoin as its unit of account.

Bitcoins can be bought and sold both on and offline. Participants in online exchanges offer bitcoin buy and sell bids. According to a study published in April 2013, using an online exchange to obtain bitcoins entails some risk. However, exchanges have since implemented measures to provide proof of reserves in an effort to convey transparency to users. Offline, bitcoins may be purchased directly from an individual or at a Bitcoin ATM. Bitcoin kiosks are machines connected to the internet, allowing the insertion of cash in exchange for bitcoins. Bitcoin kiosks do not connect to a bank and may also charge transaction fees as high as 7.0%. A wallet stores the information necessary to transact bitcoins. While wallets are often described as a place to hold or store bitcoins, due to the nature of the system, bitcoins are inseparable from the blockchain transaction ledger. A better way to describe a Bitcoin wallet is something that “stores the digital credentials for your bitcoin holdings and allows you to access and spend them.

Bitcoin as an investment asset

While the holding of bitcoins does not have any financial history such as precious metals, bitcoins are easily divisible, transferrable and fungible and appear to command a positive value relative to their cost of production (cost of mining). Despite its digital rather than physical existence, bitcoins also share several characteristics with gold bullion; (i) both can act as a store of value, (ii) there is a limited quantity of each available and therefore an infinite supply will never be created, (iii) bitcoins are difficult and expensive to “mine”  or generate and (iv) their market prices are volatile. Like other currencies, the price of a bitcoin is determined by supply and demand. There are only a limited number of bitcoins in circulation and new bitcoins are created at a predictable and decreasing rate. This means that it does not take significant amounts of money to move the market price up or down, and thus the price of a bitcoin is still very volatile. There is an opportunity that exists for traders who understand the complexity and the inherent volatility of this digital currency to trade Bitcoin through contracts for differences (CFDs).  In fact, Bitcoin can be seen as a good addition to a financial portfolio from a risk diversification perspective. One may trade Bitcoin in long and short positions against a range of currency pairs such as XBT/USD, XBT/GBP, XBT/EUR and XBT/JPY. Another approach would be to speculate on the value of Bitcoin using a BINARY.

In conclusion, the digital revolution is fast changing the way individuals, households and businesses are transacting and investing.  We believe that a virtual currency such as Bitcoin holds a long term promise for a much faster, secure and efficient payment system.

 

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