What it is and what you need to know about it
Bitcoin and other cryptocurrencies have found their way into the news over the last two years. The concept of a cryptocurrency as a form of investment is relatively young. There are still many unknowns, and those who are not actively involved in the investment community remain at a loss for exactly what Bitcoin is, how it works, and whether or not it is a worthwhile investment endeavor. The confusion makes perfect sense; after all, part of the interest in Bitcoin is the mystery that surrounds it. So, what exactly is Bitcoin and how does it work?
What is Bitcoin?
Bitcoin is the first cryptocurrency created. Bitcoin is a currency that can be used to trade goods and services online, or in some locations, in-stores. Bitcoin operates much like paper money, in that its value is tied to its scarcity, but it is completely unregulated, and its value is largely tied to how many bitcoins are mined at any given time, and how many are being traded at any given time. The cost of the cryptocurrency has skyrocketed over the last two years as people have become aware of its existence and have considered Bitcoin a viable investment option.
What is the History of Cryptocurrency?
Created by an anonymous user in 2009, Cryptocurrency was slow to head into the mainstream. It took several years before Bitcoin, the first cryptocurrency created, to be spoken about in the public media, and even then, it was discussed in a more negative light. Unfortunately, the cryptocurrency hit its mainstream stride when its use in illicit markets was first discovered. While the anonymity allowed by the cryptocurrency made it the obvious choice for ne’er-do-wells, the initial purpose of cryptocurrency was not for illicit activity.
In interviews, early supporters and creators have argued that Bitcoin, at its core, was created as a way of decentralizing currency and allowing for more creative ways to store and access currency. Because cryptocurrency is not tied to any one bank or product, it crosses currency barriers and allows for freer trade across international lines.
How Does One Acquire Bitcoin?
Bitcoin can be acquired in two different ways; it can be purchased through an exchange, or it can be mined using a computer to solve incredibly complex math problems. Exchanges have been set up specifically for Bitcoin, and users can use other currencies to purchase Bitcoin.
Whether you purchase Bitcoin through an exchange or mine for it, all transactions are transferred into a wallet. The Bitcoin is deposited into an encrypted, virtual wallet for storage. From the wallet, Bitcoin can be used to pay for goods or services. The virtual wallet is anonymous, meaning the user’s name and identifying information is not available. This allows individuals to operate anonymously.
Is it a Dangerous Investment?
Investment gurus are split on this, at the moment. While some investment moguls consider Bitcoin the next big thing, others argue that without any regulation, and the currency’s lack of ties to an actual product or standard, meaning it will falter in relatively short order. Its lack of regulation is also capturing the attention of the IRS. The IRS does not receive 1099 statements from cryptocurrency depositories, and a large number of investors may fail to pay taxes on trading profits. Due to this lack of reporting, the IRS has started looking for records, and investors may find that a large amount of money may be owed.
There are a few security concerns that potential investors should be aware of, as well. Bitcoin is not FDIC-insured, meaning it’s relatively easy to lose your coin, and you’ll have no avenues to rectify the situation, either. Bitcoin is stored in a virtual wallet, either on an exchange or your smartphone. You have a long tail password that is generated when you open your wallet. If you lose your password, you cannot have it restored, and subsequently will lose your coin. If you lose your phone, you will lose your coin. If the exchange is hacked, you will lose your coin. There is little to prevent the loss of your investment, unfortunately.
Investment experts also worry that a bubble is imminent. A bubble occurs when people buy into something quickly, but as the exuberance wears off, the inflated price drops as the supply becomes higher than the demand. In short, it is a volatile investment, argue experts.
The Bottom line
Cryptocurrency is absolutely an interesting trend, that all people should be informed about, but that does not mean investment is a good idea for all individuals. Speaking with a financial advisor regarding your investment options is a good idea before you make changes to your portfolio, whether that is to purchase new stocks, or reroute the money to a more speculative option.