I’ve been getting many questions about Bitcoin (BTC) lately, so I thought to share a quick, simple article on the subject. So here goes. Bitcoin is increasingly a familiar term across the investing world. It’s present in mainstream media and is slowly making its way into a wide array of investment vehicles. At its simplest, Bitcoin is a form of currency and a payment system that is created and stored electronically.
Tron. Clu. Flynn. I know, right?
I like to think of Bitcoin as a ‘new’ money innovation in the world of finance and technology – cryptocurrency. It can’t be held physically (mostly), mainly because the process of acquiring and trading it is all electronic.
How Was Bitcoin Created?
Satoshi Nakamoto (again, I know, right?) is the software developer (or team of developers some say) who is credited with introducing Bitcoin. He proposed an electronic currency system that would not be centrally-held (be built on a public ledger), able to be transferred electronically (super-fast using blockchain technology), and with low transaction charges. Take that big banks!
In total, there are approximately 21,000,000 bitcoins in existence, for which about 17,000,000 have been discovered (or mined) and are in circulation all across the Interweb. That’s a worldwide Bitcoin market cap of $158,365,208,204 (and growing).
bitcoin mining blues
You can discover, create, or locate new bitcoins through a process call ‘mining’. But this isn’t exactly as easy as Pokémon Go. And by mining, we’re not talking about pick and shovel here.
The mining process requires you to run specialized software that solves complex mathematical problems, after which you get rewarded with a small portion of a Bitcoin ‘block’. Today the processing power (and electricity infrastructure) required to mine bitcoin is so large that the costs of mining often outweigh any reasonable return on investment. (At today’s market value at least).
You see, bitcoin mining is intensely complex. Beyond navigating the difficult path of setting up a cutting edge bitcoin miner, there is mining ‘difficulty’. In short, as more miners are placed on a network, your portion of a successfully discovered block is reduced. Also, as more bitcoin supply or blocks are discovered, the reward is continuously ‘halved’. Altogether this enacts a sort of scarcity to the currency, thus increasing its value.
I promised to keep it simple – but if you’re interested in learning more, check out more at https://blockchain.info/
Transparency – Different From Other Currencies
So by now you’re either confused or totally turned off by Bitcoin and its idiosyncrasies. Well, don’t give up yet. Let’s highlight it’s softer, simpler side.
Again, Bitcoin is not centrally controlled. It’s a peer-to-peer system based on a network that is decentralized, and the transactions are stored on a public ledger called the blockchain. For all to see. The blockchain can be viewed as a huge public database that is open to every person who is using the network. It records every single transaction in real time, allowing everyone to see what is happening within the network.
What does this mean for we lowly programs, I mean people? Quick transfers of funds. Low fees. Transparency throughout the transfer process. All good things, right? Haven’t you ever wondered what those banks are doing with your money?
Speculative Investing in Bitcoin
Sure, I’m pro-Bitcoin (I’ve been involved since 2014), but with a catch – Investing in Bitcoin and other cryptocurrencies like Etheruem is purely speculative investing. Yes, Bitcoin can be a smart investment move for a speculative investor. 1 Bitcoin traded at $0.30 in January 2011. Today, the market price is nearly $10,000 and rising. (I generally don’t like these hindsight scenarios, but . . . ) If you invested $3000 in Bitcoin in January 2011, that investment would value . . . let's just say, ALOT! Incredible, right?
For the speculative investor, this might have been just another day in the office. Speculative investment is all aimed at getting maximum profits when the price of a financial instrument fluctuates. The speculative investor buys the financial instrument which can be currencies, art or even real estate, and waits for the time when the price is right, and then sells it. It’s just like buying Bitcoin at $0.30 in 2011 and selling it at over $2900 in 2017. Speculative investment has high risks (for both gains and losses). It is advisable to spend only a small portion of your funds . . . for me, that means 1 to 2% (at most).
Speculative investing in cryptocurrency is filled with risk. More risk than reward at these early stages if you ask me. Despite being very attractive, some financial analysts predict that the bubble in Bitcoin and other cryptocurrencies will burst for good. They argue that the currency and its exchanges can be subject to manipulation by smaller groups of people (i.e., scams, ponzis, pump and dump). Also, it’s frequently touted that Bitcoin is the preferred currency of cybercriminals because of it’s anonymity. Likely all true. And something to ponder before placing your funds in cryptocurrency.
Still in? here’s how to get started.
In my opinion, the time of the home bitcoin miner is long past gone. Unless you own a small country and have access to free electricity, the mining option is not profitable. However, you can enter the Bitcoin investing world fairly easily through Market Exchanges. On most exchanges, you can purchase bitcoin and start trading right away.
But do your own research. Every exchange is different – security, funding parameters, trading fees, etc. Here is a quick link that reviews exchanges.
https://99bitcoins.com/best-bitcoin-exchanges-comparison-review/
Having lived through some fits and starts in cryptocurrency investing, I’ve established some confidence using the Coinbase.com exchange for all of my Bitcoin investing.
Security is strong at Coinbase. Automated buy features are helpful. Cold storage (virtual wallet) options are a must have for me.
It’s a fairly simple setup. If you’re interested, check it out.
My personal bitcoin investing advice:
- if you’re not able/willing to learn the ins and outs (i.e. nomenclature) of cryptocurrency, stay away.
- if you’re not able/willing to categorize Bitcoin investing as purely speculative (i.e., with only small amounts of funds), stay away.
- if you ARE PATIENT enough to ‘buy and hold’ Bitcoins, then come back after 5 to 10 years and see how your investment has grown, then GIVE IT A TRY.
On the other side of the screen, it all looks so easy. –Kevin Flynn