What is Bitcoin?
Bitcoin is a major innovation and paradigm shift in the financial industry based on transparent and open-source software and a decentralized network that does not need a central authority to work.
Bitcoin uses an open-source, peer-to-peer protocol to conduct, verify and record transactions. It is a decentralized form of currency not backed by any government or financial institution or pegged to the value of any hard commodity such as gold.
Why Bitcoin exchange
Very similar to equity and currency markets, Bitcoin is traded in an exchange where people are both looking to purchase or sell the currency.
There are currently several exchanges across Europe, US and also Asia that help users to buy and sell Bitcoin using their base currency.
Economics of Bitcoin
How Bitcoin fits within the economy and whether it is a currency or commodity are still being debated.
"Peter Surda" says:
From the point of view of market actors, Bitcoin can be interpreted as a de-centralised clearing mechanism, based on a virtual unit (called bitcoin with a lowercase b). The clearing is controlled by asymmetric cryptography, the public key identifying an account, while a corresponding private key allows sending balances from that account. In addition to clearing, Bitcoin also contains an inelastic production function. Clearing mechanism together with a defined supply allows Bitcoin to be used as a medium of exchange.
Whether you call it a currency or commodity or a quasi-commodity (Selgin (2012)) from a trading perspective, Bitcoin is an instrument just like other currencies which can be bought or sold.
Risk is mentioned in the description of every financial product and the potential gain is calculated based on the rewards.
When it comes to investment, Bitcoin is not dissimilar to any other financial product and the fact that it's a new phenomenon, naturally, it will have more potential for volatility before it becomes stable.
Bitcoin's value is ultimately proportionate to the trust of people, whether they are early adopters or are just starting to use it for day-to-day payments, and this will drive the growth of Bitcoin as it's becoming more and more integrated into the world's economy.