With all the buzz around Bitcoin and its digital currency counterparts this holiday season, many people have become swept up in the cryptocurrency craze sweeping the nation’s financial headlines. I’ve put together a brief explanation of what exactly this mysterious currency is…or isn’t.
So What is Bitcoin?
Bitcoin was originally designed to be more or less (at least theoretically) an untraceable and unhackable version of PayPal or Venmo, where people can exchange and store currency anonymously. However, so many people got so excited about buying into this system that an entire market has developed around buying and selling it. Bitcoin has become less important as a currency than as a commodity (like gold).
Can you still buy things with Bitcoin? Sure you can. Just like you can buy goods and services with gold. Well…sort of. After all, who walks into their local grocery store and pays in gold coins and bullion? Many more people are now using Bitcoin as an investment vehicle.
Is It a Currency or Commodity?
Fundamentally, Bitcoin is supposed to be a secure system for storing and exchanging money anonymously on the Internet. It works like untraceable money (there’s a reason criminals love it). You can also think of it like a safe deposit box without a bank, where you can store money away from the prying eyes of governments and regulators (this is why the libertarian community and privacy advocates love it). In another respect, it’s a tradable financial asset like a stock or bond. You could theoretically use bitcoin to make money…perhaps a lot of it, especially in the past few months of 2017.
Unlike most currencies, Bitcoin is not regulated, supervised, or endorsed by any government. It has insane price volatility which makes transactions complicated (and undermines the safe deposit box approach), and – unlike the stock market where valuations are based (at least theoretically) on expectations of future company value, there is no fundamental basis of speculative value for bitcoin.
Hold On…Is Bitcoin Real?
No. But then again, an argument can be made that the US Dollar isn’t real either.
Why the Heck Would I Buy Cryptocurrency?
You’d buy Bitcoin for the same reason you’d buy anything else: because you think it’s worth something. There are several reasons:
- You value anonymity. Many people like operating anonymously on the Internet and knowing their transactions are untraceable.
- You need to move your money out of an economically or politically unstable country.
- You want to move your money quickly and without taxes or currency controls.
- You might have believed in the philosophy behind cryptocurrency – that someday, it may be widely adopted as a day-to-day currency, and you wanted to buy in early (sorry, the early-adopter stage has passed).
Nowadays, people are buying into cryptocurrency because they think they can make money (the investment stage). In this case, what’s valuable is the fact that everyone else is buying Bitcoin and you think the price will continue rising.
Will the Price Keep Rising?
Unlike most regular currencies whose purchasing power declines over time, Bitcoin was designed to be a deflationary currency. That is to say that there are a limited number of total Bitcoins, and new coins are added to the market slowly. What will drive the price up is having more and more people show up hoping to buy the existing coins, effectively bidding up their value. But that’s a huge “if”. If cryptocurrency never reaches widespread adoption, or if it’s too difficult to convert into usable cash, the value will go down.
Seems Pretty Risky
Yes. It is. Even if we set aside the long-term case for crypto, the short- and medium-term volatility is dizzying. On paper, 2017 was a very good year for Bitcoin. At this time last year, one Bitcoin was worth around $900. At the moment it is worth about 15 times that. But this is very stressful to Bitcoin investors. Within just one week in December, Bitcoin prices hit a high of over $19,000, dropped to as low as $10,400, and then climbed back up to aboove $15,000 just 24 hours later.
Why Do I Want to Bother?
That’s up to you. If you want to jump on the cryptocurrency bandwagon, you can invest through one of the major cryptocurrency exchanges (Coinbase, GDAX, or CEX.IO are a few examples). Here, you can buy and sell Bitcoin and other cryptocurrencies (Bitcoin, Bitcoin Cash, Ethereum, and Litecoin). Sign up, get verified, dump some cash into the market, and trade away!
On the other hand, if you want to experience cryptocurrency’s price volatility without owning it directly, you can buy shares through your traditional IRA or 401k account with brokers such as Charles Schwab, TD Ameritrade, Fidelity, or E-Trade. You’ll want to invest in the Bitcoin Investment Trust (symbol: GBTC), managed by Grayscale Investments, an investment management firm that deals exclusively in crypto. For the rough equivalent of one bitcoin’s worth of exposure, buy ten shares.