If we tried to remove or move a block from the bottom of the tower, the entire structure would be destroyed, because each block in the tower has information from the previous block encrypted within itself. Inserting a block with a different piece of information (a different cipher) would result in a mismatch with the previous one. Moreover, all subsequent blocks would be disconnected. As a result, the information contained in the tower would be treated as untrue. This is why blockchain technology is considered a breakthrough in the field of security.
Method one – data encryption
To start making money on cryptocurrencies, you can, of course, buy specialized equipment for encrypting information and receive remuneration in the form of bitcoins for your contribution to the IT system. However, this requires specialist knowledge in the field of programming and the selection of advanced computer hardware, which is not the cheapest.
Method Two – Bitcoin (BTC) Exchange
You can also open an anonymous cryptocurrency account and buy cryptocurrency for ownership and hold it through the BTC exchange. However, this carries two types of threats.
First, when we make a transaction on a cryptocurrency exchange, our funds are not on our account, but on the exchange’s account. Unfortunately, the short history of cryptocurrencies already knows spectacular examples of crypto-exchanges that were closed overnight, disappearing with investors’ funds (Mt Gox or the Polish bitcurex). There are also examples of cryptocurrency exchanges that have been robbed by hackers (Bithumb).
Secondly, if we lose our login and password to the account or someone steals them from us, we will lose our cryptocurrencies irretrievably, without the possibility of applying for help. There is no place we can turn to to recover lost data or stolen bitcoins.
Method Three – Investing in CFD derivatives
The last method we will present in our eBook is investing with contracts for difference. But what is hidden under this mysterious term? Contracts for difference (CFDs) are derivatives that reflect the price of the underlying asset. This means that CFD rates are formed in accordance with the prices of their counterparts on the market. Such a modern solution has several advantages, including the possibility of investing in the rise and fall of the price of a given instrument.
If we assume that the price of Bitcoin will fall, then we open a short “sell” position.
If we assume that the price of Bitcoin will rise, then we open a long “buy” position.
This can be considered an advantage, given that cryptocurrency prices are very volatile. At the same time, however, it is also associated with greater risk. In addition, bitcoin faces certain risks that may affect its price decline in the future.
Bitcoin (BTC) valuation
The first step in formulating any valuation is to indicate the intrinsic value of the instrument. Intrinsic value tells us what value an asset has, provided that we have all the information available. Due to the lack of this information, we have to make assumptions and estimates, which makes the intrinsic value a bit unclear. In some cases, such estimates are quite tangible, while in others the assumptions themselves are difficult. Let us consider stocks and their intrinsic share values. If we know the financial statements and the current economic situation, we can assume the course of future events and discount future profits based on the present value. Different analysts take into account different assumptions, which means that they sometimes achieve quite radically different valuations. However, they are at least able to agree on the intrinsic value valuation methods, which are well sanctioned by the financial literature. In the case of Bitcoin, this is not how it works.
Bitcoin doesn’t generate profits or pay dividends, so any analysis that applies to stocks won’t work for Bitcoin. Since Bitcoin does not represent any single economy, we cannot treat it as a traditional currency that can be modeled using macroeconomic variables and interest rates.
Bitcoin needs to be thought outside of the existing patterns. One approach measures the utility of Bitcoin as a means of payment/transfer. The main purpose of Bitcoin and blockchain technology is to facilitate payments. They differ from the traditional banking system in many ways, but the usefulness for the user is more or less the same. Let’s consider the costs of transferring money from Bitcoin. Miner salaries fluctuate, but have recently been around $2 per transaction. This cost is lower than a traditional money transfer through the banking system, which in Europe is usually in the range of $5 to $10. So, from the user’s point of view, blockchain is cheaper. However, the total transfer cost is the total sum of fees and the value of the reward that miners receive for solving a block. The salary is currently 12.5 BTC per block and will get lower and lower over time. Once all 21 million Bitcoins have been mined, miners’ rewards will only consist of fees, so it’s worth looking at the total cost of confirming a transaction. With a price for one Bitcoin of $4,300 (2), a miner’s salary is almost $54,000. Due to the fact that there are about 1800 transactions in each block, the “cost” is distributed among all of them, and when you add the fee, the real cost of confirming a transaction on the blockchain rises to $31.86 (3) – much higher than in the case of the traditional banking system.
However, it is worth looking at it long-term (as in the case of technical resources, which even if they are currently loss-making, they offer huge benefits in the long term), so we simulated the changes in transaction costs over the next 5 and 15 years. We know how much the miner’s reward for solving a block will decrease and for simplicity we assume that the fees will remain unchanged at $2 per transaction. We also assume that the price of Bitcoin will increase by an average of 10% each year – much slower than before. We don’t know how many transactions will be processed in a block in the future, but due to the implementation of SegWit2x (which is already taking place), we assume that this size will double. This brings us to transaction costs of $14.02 in 2022 and $5.90 in 2032.
In this simulation, the cost of a Bitcoin transaction does not reach the current cost of the banking system until 2032, but it would be reasonable to assume that the banking system will adapt to changing market conditions over time and may offer much more competitive conditions. So, is the suggestion that Bitcoin’s current price is too high and/or the assumption that a 10 percent annual price increase too optimistic? We leave it to the readers to draw conclusions. It should be borne in mind that by changing the assumptions about the number of transactions in a block, we can get different results. Besides, Bitcoin stands out for many other prices than just the cost. It is also the time to confirm transactions, which is currently much shorter than in the banking system, as well as privacy, which is valued by a wide range of people (including the shadow economy).
On the other hand, it could also be that competing technologies (including block technologies) will appear on the market, prompting Bitcoin to offer cheaper and more efficient services. Therefore, the above simulation is for demonstration purposes only.