Bitcoin as an investment tool analysis

Analysis of Bitcoin as an investment tool

The global financial and economic crisis of 2008 led to the collapse of public confidence in the modern financial system. Its flaws are apparent and have repeatedly been at the heart of emerging crises in both regional and globally. Printing money controlled by central banks, the speculative nature of financial markets, and monopoly of the big banks formed the image of the known financial system. In the peak of the crisis of 2008 a part of society was wondering if there may be a new financial system, different from today, to be more fair to people and to overcome the weaknesses of the current one. The crisis of 2008 gave an excellent opportunity for the development of new alternative. New revolutionary and powerful payment option like the Bitcoin. Virtual currency is the first of a kind and meet great public interest during the difficult years after the crisis. Bitcoin is not just a virtual payment tool it is a comprehensive system that is opposed to the modern, controlled by major banking institutions. This is one of the reasons why a significant part of the society was interested in the development of this phenomenon, whose creator was the mystery Satoshi Nakama.
The very revolutionary system is based on block-chain that is publicly shared ledger, which relies entire Bitcoin network. Independence and consistency of block-chain are guaranteed by the cryptography. Everyone can have Bitcoin wallet where to hold his Bitcoins and accordingly carry out various transactions with them. Every Bitcoin wallet contains a unique key, which ensures high security and proof that the transaction is executed by the owner of the wallet. The transfer of a number Bitcoin from one user to another takes about 10 minutes, which is much faster than conventional bank transfers especially if they are international. In order to make a transfer, you need a block where transaction data is stored. These units cover very strict cryptographic rules. Those blocks are been checked by the network. Blocks are been connected in series, forming so-called “block chain”.

Bitcoin chart 1

The uniqueness of this system is and its main advantages like monetary freedom, extremely low fees for transfer, fewer risks for merchants a high degree of security and control, transparency and neutrality. These benefits are the main reasons for the growing public interest in the project “Bitcoin” and the increasing its value over the years (Figure 1)

In the past years, a number of financial institutions have decided to invest funds in the development of the “block chain” which uses Bitcoin. Some of the famous names who invested a lot of money in this project are: Goldman Sachs, Visa, Maestro, NYSE, Nasdaq, BBVA, Citibank and others. The great interest and cause high volatility in price as the biggest jump occurred in the period from late 2013 and early 2014, when it reaches a level of $ 1,000 per Bitcoin. The price of cryptocurrency in 2013 increased from 13.52 USD to 714.79 USD at the end of the year, up about 400% and the standard deviation for the same year was approximately 150.28%. In 2014 following a substantial decline in the price, it decreased from 896 USD to about 317 USD, which is a decrease of 103.75% with a standard deviation of 74.71% on a weekly basis. Definitely the years from 2011 to 2014 were some of the most volatile and the most dramatic in the price change of digital currency. From one point it is normal, due to the great interest that sparked the Bitcoin during that time. High volatility attracted the large speculators who helped to significant price increases in 2013. When a number of economists and financial analysts called this phenomenon “another speculative bubble.” In Figure 1 it can be seen that after 2013. follows a gradual decline in price during the past 2015 virtual currency again marks a significant yearly growth of 55.48%, stabilizing at around the price of $ 420 Bitcoin at the end of 2015. Volatility remained high as in 2015 standard deviation is up to 60.18% on a weekly basis.
Bitcoin launched an entire market of cryptocurrencies, which today are about 400 different types of digital currencies. However, it remains the largest market capitalization of about $ 6 billion, which is 90% of the whole market of virtual currencies. During its peak market capitalization of Bitcoin has reached the level of 12 billion dollars.
One of the specific features of Bitcoin is here that inflation is impossible phenomenon due to the fact that it limit the number of Bitcoins, which is 21 million dollars, and this limit is planned to be reached in 2140g. Until then gradually “mining” of Bitcoin using powerful computer systems will be with increasing difficult, and the number of Bitcoin in one block will be reduced by the time it was 25 for Bitcoin block. This excludes the possibility to carry any monetary policy that can cause inflation. This is one of the main differences between digital currency and today’s monetary system controlled by central banks. Currently the number of Bitcoins is 15,297,325 (see. Fig. 2)

By the time been, more and more people begin to use digital currency payment and a number of shops and retailers in major cities around the world have decided to accept the payments in Bitcoin. Therefore there is constant growth of Bitcoin transactions globally. At the beginning of 2016. The number of transactions per day increased to about 250,000 (see. Fig. 3). Some of the most popular companies such as Microsoft, Dell, PayPal, WordPress, Ebay, Wikipedia, Tesla now accept payments with virtual currency.

One of the main advantages of Bitcoin is the speed of the transactions. Through the “block chain” each user can send Bitcoin to another regardless of where it is in the world. The time for confirmation of the transaction is about 10 minutes (see. Fig. 4). This time is much shorter than the time it takes to send money through the banking system, where if our customer is a person living abroad, money that will be sent to the recipient’s account after a few days. Another thing is that using Bitcoin, you do not need to pay high fees as we have in bank transactions.

bitcoin

bitcoin

The process of creating Bitcoins and adding new units to the chain is related to the computing performance of the computer systems. The more people involved in the process of creating Bitcoin (ie. “Mining”), the more complex arithmetic tasks must be solved by computing that we use for that purpose (see Fig. 5). Today in China and the US are the largest “farms” for Bitcoins using multiple ASIC devices which operates 24 hours seven days a week to providing a solid to the owners of this farms.