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What Is Driving Bitcoin?

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Wed, May 24, 2017 07:05 PM

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Why is a cryptocurrency worth anything? Why does it have value? Briton Ryle explores these questions

Why is a cryptocurrency worth anything? Why does it have value? Briton Ryle explores these questions and more in light of the Bitcoin and Ethereum surge. What Is Driving Bitcoin? [Briton Ryle Photo] By [Briton Ryle]( Written Wednesday, May 24, 2017 I feel like I let you down on this one — like I really dropped the ball. You see, on March 29th of this year, I was in New York City for an investment conference sponsored by StockTwits, called StocktoberFest. There were a lot of startup founders and venture capitalist types there, pitching their big moneymaking ideas. There was lots of "fintech" — financial technology. One app, for instance, sought out and allocated your savings into the highest-paying internet banks. This was a good one — there was no fee, and the app could take your savings account from making 0.004% at Bank of America to making 4% in a reputable internet-based bank. But by far the most popular topic was cryptocurrencies, like Bitcoin and Ethereum. It seemed like all the venture capital people were scrambling to get their money into funds or exchanges or companies that dealt with digital money. Onstage interviews would go like this: Q: So, what stocks do you like right now? A: Well, obviously Apple and Amazon are amazing, and they aren't going to slow down. Google is amazing, too. But I'm putting my money into Ethereum. Really, nobody wanted to talk stocks and companies. When they did, they could only mention the big ones: Apple, Google, and Amazon. Honestly, I was disappointed. But like I said, I'm more disappointed now. I was getting some fantastic investment insight, and I didn't recognize it at the time. In a recent interview, Amazon CEO Jeff Bezos shared his thoughts on an emerging investment opportunity. He called it “gigantic” and says it puts humans on "the edge of a golden era": [bezos-clip]( [IDC is forecasting this market will surge past $47 billion]( by 2020... And for savvy investors like you, that could mean a windfall of stock market returns. Simply put? [This is NOT an opportunity you want to miss.]( At the time of that conference — March 29 and 30 — Ethereum cost about $50 each. Today it's around $180. Yep, that's a 260% gain in two months. Bitcoin has just about doubled in that time frame. Those are impressive gains. The kids in my office are whooping it up pretty much every day. And I missed every damn bit of it. But I'm not going to be a grumpy old man on this one. Because get this: All the Ethereum together is worth $17 billion. All the Bitcoin is worth $35 billion. The total value of all the different cryptocurrencies is about $80 billion. That's just a little less than the entire Starbucks corporation. $80 billion means this is more than just a fad... So, what is going on with these cryptocurrencies? What Is a Cryptocurrency? Let's get the definition out of the way. Investopedia says a cryptocurrency is: A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation. Is that helpful? Probably not. Bitcoin and others are like internet money. They exist only in cyberspace and can only be used there. But since our bank accounts also live in cyberspace, it works out. The biggest contribution cryptocurrencies have made is the use of the blockchain. Each unit of a cryptocurrency is represented or expressed by its blockchain. Where a $1 bill is represented by the cloth it's printed on, the iconography, and the serial number, the blockchain is a series of digital numbers and symbols that "are" the currency. So if you buy something online that costs half a bitcoin, then half the blockchain of your bitcoin gets immediately sent to the other party, and the transaction is complete. It's all encrypted, and my understanding is you can't fake it. Now, here's the really interesting thing: Blockchain transactions settle immediately, in the nanosecond it takes for the blockchain to move across the Internet. Bank transactions don't settle like this. Even though you might use a credit card to buy an item, and you can see your balance change and you can actually take possession of the item, the transaction hasn't actually settled. The merchant has simply accepted an IOU from your credit card company. It's a loan that won't be settled until the actual cash shows up in a day or two. This is why you pay a fee at an ATM. You're actually accepting a loan from another bank. It's pretty archaic when you think about it. There are lots of vulnerabilities, and this was a real problem during the financial crisis. Banks literally didn't trust that these overnight settlements would happen as scheduled. What if your counterparty declared bankruptcy like Lehman and Bear Stearns? This is why all the major banks and credit card companies are testing the blockchain. They will all use it at some point fairly soon, and this gives the technology behind cryptocurrencies instant legitimacy. But the bigger questions are: Why is a cryptocurrency worth anything? Why does it have value? Homeless man turns $500 into $978,750 in just five weeks Jake Studebaker had lost his house... and was living on the streets of Los Angeles. Things were looking pretty grim for Jake, until one day he was notified that his grandfather left him a $500 inheritance. You won't believe what he did with it... Jake went into a local brokerage office and turned that $500 into $978,570 — in just five weeks of trading — all thanks to a simple secret he discovered. The brokers were absolutely stunned. But here's the thing: you can do this, too. [Click here to learn more.]( The Eye of the Beholder So, that's a big question. And there's no reason to drill down to the point where we say, "All paper money is worthless unless it's backed by gold, and what's gold worth anyway, it's still based on belief." You may have heard that Bitcoin gets its value because you have to have a computer "mine" it. That is, you have to invest in a lot of processing power, and then that processing power has to run a bunch of algorithms, until — POOF — a bitcoin is created. That bitcoin has value based on how much that processing power (the computer) costs and how long it took to run the algorithms. Maybe the cryptocurrency called Ethereum is a better example. There are startup tech companies right now working on really cool stuff, and the only way you can invest in them is with Ethereum. They don't take cash. They are actually building an economy based on Ethereum. If a startup company is successful, then that adds value to Ethereum. Its value becomes tied to the company. It's not that different from how stocks gain and lose value. For the record, I find the notion that Ethereum can get value because it represents ownership of an enterprise very interesting. The notion that Bitcoin is valuable because it's difficult and expensive to create isn't as fun. Now, final question: Why? Why does anybody want to own and use cryptocurrency? For many of those VC people at the conference I attended, technology has its own value. And so if they can do something with technology, like create a digital currency, they do. It gains legitimacy and value as more people adopt it. As we all know, when an asset starts going up in price, people become aware, and they buy in. It happened with tulip bulbs, it happened with Beanie Babies, and it's happening now with cryptocurrencies. They are moving higher, and so people are buying in, making them real. The kids whooping it up in my office are doing that right now. Their purchases — and their sales — are making these cryptocurrencies legitimate. And it's getting big. Japan has basically recognized cryptocurrencies as legitimate. Use of them is apparently surging there. But there's another side to the value of cryptocurrencies: the criminal element. You know how India recently banned high-denomination bills to help fight black market activity? Well, some of those criminals are putting money into cryptocurrencies because they are anonymous. Same with drug cartels, Russian mobsters, and Chinese trying to get money out of China. Cryptocurrencies are the perfect vehicle for criminals. And, strangely enough, their purchases also help to establish a true value for cryptocurrencies. Bottom Line As I see it, cryptocurrencies are here to stay. But I can't for the life of me figure out how to value them. I can tell you that the moves we've seen so far this year absolutely can continue. And while the grumpy old man in me wants to say, "That's it! It's a bubble, get those cryptocurrencies off my lawn," I'm also about to buy some because, well, what if? Until next time, [brit''s sig] Briton Ryle [[follow basic]@BritonRyle on Twitter]( An 18-year veteran of the newsletter business, Briton Ryle is the editor of [The Wealth Advisory]( income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the [Real Income Trader]( advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the [Wealth Daily]( e-letter. To learn more about Briton, [click here.]( Enjoy reading this article? [Click here]( to like it and receive similar articles to read! Browse Our Archives [Sit-On-Your-Ass Investing]( [One More Reason Tesla Inc. (NASDAQ: TSLA) is Going to Crash]( [Memorial Day Profits]( [This Is How Professional Investors Run Rings Around You]( [Impeachment and Stocks]( --------------------------------------------------------------- This email was sent to {EMAIL} . It is not our intention to send email to anyone who doesn't want it. If you're not sure why you've received this e-letter, or no longer wish to receive it, you may [unsubscribe here](, and view our privacy policy and information on how to manage your subscription. To ensure that you receive future issues of Wealth Daily, please add wd-eletter@angelnexus.com to your address book or whitelist within your spam settings. For customer service questions or issues, please contact us for assistance. [Wealth Daily](, Copyright © 2017, [Angel Publishing LLC](. All rights reserved. 111 Market Place #720 Baltimore, MD 21202. The content of this site may not be redistributed without the express written consent of Angel Publishing. Individual editorials, articles and essays appearing on this site may be republished, but only with full attribution of both the author and Wealth Daily as well as a link to www.wealthdaily.com. Your privacy is important to us -- we will never rent or sell your e-mail or personal information. [View our privacy policy here.]( No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned. While we believe the sources of information to be reliable, we in no way represent or guarantee the accuracy of the statements made herein. [Wealth Daily]( does not provide individual investment counseling, act as an investment advisor, or individually advocate the purchase or sale of any security or investment. Neither the publisher nor the editors are registered investment advisors. Subscribers should not view this publication as offering personalized legal or investment counseling. Investments recommended in this publication should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company in question.

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