Bitcoins: The Good, The Bad And The Divisive

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Bitcoin prices remain volatile today, and more and more investors are considering adding them to their portfolio. But would they make a good addition? Bank of America Merrill Lynch analysts seem to really like the digital currency, but they warn that at current levels, they run the risk of surpassing their estimated value.

What’s to like about bitcoins?

Analysts David Woo, Ian Gordon and Vadim Iaralov especially like the security, limited supply and ability to divide bitcoins. Because of these features, they believe bitcoins could become “a major means of payment” in the ecommerce space and could even become “a serious competitor” for providers of traditional money transfers. They see plenty of growth potential in bitcoins, but in the best-case scenario, they see it as being worth $1,300—a price it has been approaching over the last couple of weeks.

The BAML analysts estimate that the maximum market capitalization of bitcoins is around $15 billion, assuming the digital currency becomes “a major player” both in ecommerce and money transfer. They are also assuming that it becomes “a significant store of value with a reputation close to silver.”

What could bitcoins be used for?

The analysts said currently the biggest hindrance to bitcoins’ success in payments is the volatility, which is the result of recent “speculative activities.” They note that the digital currency was previously used as a “store of wealth for the underground economy.” They are referring to purchasing activities like those done on the now-defunct illicit marketplace Silk Road.

Some have said that bitcoins could help users avoid paying high taxes, control capital and prevent confiscation. However, they think since all bitcoin transactions are “publicly available” and that each individual bitcoin has a unique transaction history attached to it will probably limit its use in the black market. (No wonder U.S. regulators are so interested in them!)

Breaking down bitcoins

While most people are generally aware that bitcoins are a digital currency, they are still largely misunderstood. With a single bitcoin trading at around $1,000, it may seem as if the entrance market for traders is high. However, the currency is divisible, with the smallest unit of a bitcoin being called a satoshi.

There are 100 million satoshi in every bitcoin. Because of what bitcoins are, there will never be more than 21 million of them. As time goes on, the number of them in circulation is going to increase predictably because of the computer code which lies underneath. In 2140, that 21 million cap will finally be reached. Currently there are about 12 million bitcoins in circulations.

Interestingly enough, the computer code attached to bitcoins can follow every single satoshi inside them. A unique string is added to every satoshi, creating a public history or transaction ledger which provides a trail from the original owner to the current owner. This history provides the person accepting the bitcoin with proof of how the other person came to own it, thus reducing or maybe even eliminating fraud at some point.

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