Not many experts would recommend packing investment accounts like 401(k) retirement plans with bitcoin. The digital currency is just too volatile. But there's nothing wrong with setting a little aside — money you can afford to lose — for wild bets, like gambling a few bucks at a casino.
There are two ways to bet on bitcoin: via a specialized exchange, or through buying and selling futures contracts.
Mike Segar | Reuters
There are two ways to bet on bitcoin: via a specialized exchange, or through buying and selling futures contracts.
Bitcoin certainly offers an adrenaline rush. In 2017 the price of the cryptocurrency soared from less than $1,000 to nearly $20,000, then tumbled to a low of $6,647.33 over the weekend after a South Korean exchange said it was hacked. At press time on Monday it was trading at $6,768.00.
The investment signals remain mixed: Google search activity on bitcoin has declined by 75 percent as the price swooned from that $20,000 high, but major Wall Street firms are making investments that show they expect cryptocurrency to remain a part of the financial landscape.
There are two ways to bet on bitcoin: the "old-fashioned" way, through a specialized exchange; and, since late last year, buying or selling futures contracts.
Here's a look at what to consider in choosing one over the other.
Exchange-trading on the bitcoin spot market
New coins are awarded to "miners" for solving complex mathematical problems. Then the coins are bought and sold for dollars or other fiat currency in an account called a wallet, kept at a cryptocurrency exchange like Coinbase, Bitstamp or Kraken.
Trading on this spot market is a lot like trading a stock, with prices governed by supply and demand, and no role played by a central bank, like the Federal Reserve. Since bitcoin is not yet accepted by many merchants, its value depends on speculators' view on what others will pay in the future. To detractors, that encourages bubbles. Advocates see huge potential profits.
Most of the more than 100 bitcoin exchanges are only a few years old, and some have been victims of fraud, theft, hacks and growing pains, like halts during heavy trading.