A question of currency

Bitcoin was near the top of internet searches during 2017 and enthusiasm by potential miners and collectors is not likely to dampen anytime soon this year.

Bitcoin was ranked second under ''global search'', an overview of what was trending in 2017 - a distinction indicating search volume was higher for the technology than even some of the year's more talked about events.

The ''how to buy bitcoin'' was ranked third in the ''hot to ...'' search category, giving an example of just how strong attention on bitcoin and cryptocurrency was last year during what was a historic run-up in market prices.

Any search on cryptocurrencies will throw up many results, highlighting just how popular those currencies are. Israel is reported as wanting to set up a national cryptocurrency.

According to the latest data, a cryptocurrency is any kind of peer-to-peer digital money powered by the Blockchain technology. Since bitcoin's appearance in 2009, hundreds of new cryptocurrencies (often called altcoins) have been created, all of which offer different advantages and disadvantages compared to bitcoin. The Blockchain itself is based on the principles of cryptography, hence the name ''cryptocurrencies''.

Stories of wealth through bitcoin mining are becoming a thing of legend. Last week, the New York Post reported Cameron and Tyler Winklevoss had became the world's first bitcoin billionaires. After winning $US65million from Mark Zuckerberg in a dispute over who came up with the idea for Facebook, the twins subsequently bought $US11million worth of bitcoins with their lawsuit haul.

But with the rise will come a fall, one would expect.

Throughout history, booms and busts are commonplace in economies. In the 1630s, the tulip mania bubble burst and many Dutch people were left penniless. At the peak of the market, a person could trade a single tulip for an entire estate, and, at the bottom, one tulip was the price of a common onion.

There have been recent technology bubbles, and the global financial crisis was caused by North Americans defaulting on their mortgages, handing back their keys to the banks, leaving investors to face ruin from making risky investments for promised high returns.

No matter how many cycles of boom-and-bust investment seen around the world, investors are always tempted by the next big thing.

As global interest rates remain firmly low - even with movement by the US Federal Reserve - investors are looking for better returns. Retirees, in particular, are looking for income from their investments and getting a few percent at the bank is not what they seek.

A bitcoin exchangeable for $US120 in 2013 could command over $US11,000 as of last week, enough to tempt even the most conservative of investors.

Sharemarkets are likely to keep growing in value this year as traditional bank customers look for better income yields. Just before Christmas, billions of dollars re-entered the New Zealand economy as central and local government bonds were redeemed. That money had nowhere to go except either into bank term deposits or the sharemarket. Banks are under no pressure to lift interest rates because of the lack of investment options.

The question for 2018 investors will be is the risk of bitcoin, or other cryptocurrencies, worth taking? Markets have been here before.

With paper money, a government decides when to print and distribute money. The amount of money in an economy helps control inflation. Bitcoin does not have a central government.

Bitcoin miners use special software to solve mathematic problems and are issued a certain number of bitcoins in exchange. This provides a clever way to issue the currency while at the same time creating an incentive for more people to mine.

Bitcoin miners are said to help keep the network secure by approving transactions. Mining is an integral part of bitcoin, ensuring fairness while keeping the network stable, safe and secure.

Investors should remember, a stable, safe and secure network is still no guarantee against a sudden drop in value of a traded currency. Care is still required.

Add a Comment