Investing

Bitcoin – What It Is and What You Should Know About It

Bitcoin has been all over the headlines the past few weeks. So you’ve likely at least heard of it. You might even have a few friends “investing” in bitcoin. All this media attention surrounding bitcoin was already starting to peak my curiosity. Then this past weekend at a family get together one of my wife’s cousins asked what I thought about bitcoin. I didn’t know much. I remember first hearing about bitcoin back in 2010 but frankly, I just hadn’t been interested in it enough to take the time to learn about it. The cousin went on to explain that he had invested in some of the more popular cryptocurrencies and had already almost doubled his money. As we talked through and compared several of the various cryptocurrencies and he shared his experiences and showed me the phone app he uses to buy, sell, and keep track of it all. Fearing I could be missing out on something, it was time for me to do some more digging to figure out what this bitcoin thing is all about.

 

Bitcoin Is a Cryptocurrency

Bitcoin seems simple at first glance but is very complex to fully understand. Bitcoin is a cryptocurrency. Which means it is an encrypted digital currency. Bitcoin was created in 2009 by an anonymous person. This digital currency allows instant payments to anyone, anywhere in the world, and details of who was involved in the transaction remain anonymous.

 

What Bitcoin Is NOT

There are no physical bitcoins. If any of you do decide to get some bitcoin just be aware that it is 100% digital. There are a lot of people selling coins with the letter “B” on them and calling them bitcoins. These are scams. Here’s a snapshot from eBay with people trying to sell coins calling them bitcoin.

 

 

Where Does Bitcoin Come From?

Bitcoins are mined digitally with computers and the internet. We also know the founder(s) of bitcoin created a finite supply of them. There are a total of 21 million bitcoins that can be mined. As of fall 2017 there are a little over 16 million bitcoin in “circulation” that have been mined so far.

This digital mining I keep referring to is the record-keeping of all the bitcoin transactions that take place around the world. It is basically a public ledger in the cloud that keeps track of and verifies all the Bitcoin transactions. This record-keeping or mining is done by powerful computers. The people and computer systems mining this data organize all of this information into a certain format called a block. And each “block” of this information has an encrypted password called a “cryptographic hash”. The person or group that is able to organize all of this data and crack the encrypted password is currently rewarded 12.5 Bitcoins. The amount of the reward gets cut in half every four years.

 

Why Is Bitcoin Worth Money?

The value of Bitcoin is very similar to every other currency around the world. It is backed by faith in the system that others will accept it for payment for goods or services. Dollars are backed by faith that governments always pay their debts. Once you believe in it, the actual cost of a Bitcoin depends on many factors including the number of merchants willing to accept it as payment, if you believe others will continue to use it in the future, and whether governments will eventually ban the use of Bitcoin.

We also have to just trust that the Bitcoin software system won’t get hacked. It hasn’t yet and many of the world’s top hackers have tried. We also have to hope and believe the anonymous founder(s) won’t suddenly emerge to somehow steal it all.

Bitcoin is accepted at hundreds if not thousands or merchants already. While most of the merchants accepting bitcoin as a form of payment are internet based like Overstock.com and Newegg.com, there are a handful everyday names that accept bitcoin too. Microsoft, Expedia, and even Subway now accept bitcoin for payment.

 

Why You Need to Know This

At this point, I feel bitcoin is still a very risky and highly speculative “investment”. The price of bitcoin will continue to be very volatile with extreme price fluctuations. Nobody is making all of their daily purchases with bitcoin yet so you will have to buy and sell bitcoin to actually get some potential value out if it.

But in the long term I do think the value of bitcoin will likely go up for the following reasons.

  1. More and more people are starting to believe in Bitcoin, driving the price up.
  2. There is a finite supply of 21 million total bitcoin so the basic economic law of supply and demand should drive up the price.
  3. Bitcoin is the standard cryptocurrency, of which all other digital currencies are compared against.
  4. Its reach is worldwide. Anyone, anywhere in the world can obtain and redeem bitcoin as long as they have access to the internet.

With all of that being said. I do not have any bitcoin and do not plan to buy bitcoin anytime soon. In even the best-case scenario, bitcoin is incredibly risky. If you do decide to try your luck with bitcoin, I would only use money that you would be willing to lose because at this point investing in bitcoin is practically gambling.

Lastly, because a picture is worth a thousand words, here is a nifty infographic I came across on Investopedia.com breaking everything down with pictures.

 

 

 

Are you going to be investing in bitcoin? Or will you still with more mainstream investments like stocks and real estate?

 

Here are a couple of others interesting articles to learn more about bitcoin:

http://jlcollinsnh.com/2017/12/03/how-to-invest-in-bitcoin-like-benjamin-graham/

https://lifehacker.com/the-best-bitcoin-and-ethereum-explainers-1796654705

https://www.nateliason.com/bitcoin-crypto-reading-list/

 

2 thoughts on “Bitcoin – What It Is and What You Should Know About It

  1. I appreciate the comment Erik. Since cryptocurrencies aren’t currently a part of my investing strategy I don’t know enough about them to compare the various ones out there. I am in interested and wanting to learn more though. I will do some digging into Litecoin.

What do you think?