Are you considering investing in bitcoin? Bitcoin is an interesting investment option. We we should warn you right off the bat though that bitcoin is a high-risk, high-reward type of investment vehicle. Chances are, you’ll either make a lot of money, or you could stand to lose pretty significant amounts too.
Should you invest in bitcoin? We can’t answer that question, but you should certainly take a look at this exotic cryptocurrency. While the risks are high, some people have gone from being broke to literally being multi-millionaires through bitcoin. Once upon a time bitcoins were actually selling for less than a penny a pop. Now? A single coin can cost more than $400 dollars.
If you are wondering how to invest in bitcoin, you should find a bitcoin exchange. This is sort of like a stock market, but instead of trading stocks, you trade cash for bitcoin. There are a number of steps involved in buying bitcoin through an exchange. The process can vary from exchange to exchange. For that reason, we aren’t going to offer you a cookie cutter approach.
Understanding What Bitcoin Is
What is bitcoin? Bitcoin is one of the more exotic investment vehicles. It is a peer-to-peer currency. You can think of peer-to-peer as community driven. When people do peer-to-peer torrenting, for example, users use their own computers to upload files and then share those files with other people.
In the same way, the community created, as well as run, bitcoin. The community created bitcoins through a process called bitcoin mining. Basically, computers solve complex algorithms. When a person or party solves algorithms, they get bitcoins as reward. These algorithms, in turn, create what are called blocks. These blocks are then added to something called the public ledger. This ledger is a history and outline of all of the transactions that have ever been conducted via bitcoin.
As people mine more and more bitcoins, the mining process becomes more complex. Further, over time the number of bitcoins awarded decreases. The exact process for decreasing bitcoins is a bit complex. However, suffice to say that over time the number of new bitcoins entering the market decreases. In fact, the whole story is quite complex, but this more or less sums it up.
The decreasing supply of bitcoins has an important impact on the price of bitcoins themselves. This is especially important for investors to understand. One of the primary problems with traditional money is that governments continue to print more of it up. When supply of something increases, the price of the thing being produced tends to trend downwards. The same is true of money. When more money is printed up, the value of the currency tends to decline.
If you go and look at all the times the United States, Japan, Europe, and other countries that launched quantitative easing programs, you will notice that each respective country’s currency tended to decline in value. A few years ago, for example, a euro could buy roughly $1.4 dollars. These days, a euro can buy just over a dollar. Quantitative easing largely caused this drop.
Bitcoin as Shield Against Inflation
For investors this represents a problem. Keeping cash on hand is dangerous, because the dropping value of cash will slowly erode your wealth. This erosion is a process generally referred to as inflation. One option to protect against inflation is to invest in stocks and other financial assets. As long as stock prices rise at a rate that is faster than inflation your wealth will be protected. Of course, if stock prices drop, you will lose money.
Bitcoin for Liquidity
Many investors and wealth managers are weary about leaving all of their wealth in stocks. First, stock markets are risky, so values could also drop. Second, stocks, bonds, and other assets are not the most liquid assets in the world. If you want to raise capital through your stocks, you’ll have to sell them. Often, this means markets must be open. Further, if stock prices have temporarily dropped, but you need to raise money, your only option is to sell the stocks at a loss. This is true even if you’re confident that stock prices will rise in the near future.
Bitcoin is an interesting option because it is more liquid than stocks (in many cases, at least). Some people don’t consider bitcoin a true currency, but instead an investment vehicle. Other people argue it is a currency, and you can buy goods with the crypto-currency from some websites and stores. Either way, exchanging it for a traditional currency, such as the U.S. dollar, is generally quite easy through bitcoin exchanges. At the same time, the limited supply and production of bitcoin means that prices may continue to rise over the long run.
Risks in Investing in Bitcoin
Of course, there are risks. Bitcoin’s value exists in our imagination. It has no real-world use value. It is recognized as a currency by no government. It is not backed by any commodity. More or less, if everyone woke up tomorrow and decided that bitcoin was worthless, it would be worthless. Much could be said of fiat currencies. They are no longer tied to commodities and with so many governments drowning in debt, it’s questionable whether they are worth as much as they seem.