One of the hottest trends right now is bitcoin.
Chances are that you've heard about it, and the fact that a bitcoin reached $1,000.
But what is Bitcoin? And is it really the next big thing in investing?
A Brief Overview Of Bitcoin
Bitcoin is a digital currency. It's created out of computer processing power. You can sign up to become a "miner" lending your computer's processing power to the efforts, and receiving portions of bitcoins in exchange. The process is slow, however, It's often easier to just purchase bitcoins on the market.
You can use money in various currencies to purchase bitcoins from exchanges like Coinbase. As of this writing, one bitcoin is worth around $700 on the exchange, although bitcoin has hit the $1,000 mark. Visit CoinMarketCap to get the latest price or news.
It's possible to use bitcoins to buy goods and services. In fact, there might be someone in your local area that accepts bitcoins in payment.
There are no fees involved; it's a straight exchange of goods or services for currency. Even some payment apps like Cash App, Venmo and PayPal are adding Bitcoin purchasing to their apps.
So far, transactions in bitcoins are rather "small" -- many goods and services can be bought for between 0.15 and .50 bitcoin.
Part of the reason that bitcoin has such potential for growth over time is due to the limited supply. First of all, a full bitcoin is created at a relatively slow rate. Additionally, the creators of bitcoin insist that the total number of bitcoins issued will not exceed one million. Whether that remains the case is far from certain, but right now bitcoin is a currency that is meant to have a limited supply.
Bitcoin isn't backed by any government or by any "hard" asset. As long as it is accepted as payment, and as long as people are willing to buy it with other currencies, it will remain solvent.
It is also very hard to trace. You are responsible for keeping track of your own bitcoins in a digital wallet. You can download a wallet to your computer. It's important to back up your wallet, though, since if something happens to your computer, and your wallet is erased, your bitcoins are irretrievable.
Should You Invest in Bitcoin?
Bitcoin's popularity has exploded recently, and there are some bitcoin millionaires. However, the rapid rise in the value of bitcoin in relation to other currencies and assets, has some thinking that bitcoin might be more of a speculation than a true investment.
Before you decide to purchase bitcoins, it's important to consider your own investment needs and your risk tolerance. (If you manage to get into mining, you might be able to acquire bitcoins without paying money for them.)
If bitcoin doesn't end up going mainstream, and if enough people get nervous about the fact that there is no "official" issuing authority or backing for bitcoin, the whole market for the digital currency could collapse.
On the other hand, if you think that this is the future of currency in a world connected digitally, and if you have the risk tolerance to handle it, it might be worth it to buy some bitcoins.
Only you can decide for yourself whether you think bitcoin has potential, or whether it is in a bubble.
What are your thoughts on Bitcoin? A good investment or merely speculation?
UPDATE: Since this article was written, Bitcoin has surged to over $60,000, so a small investment back in 2013 by many lead to the creation of many new millionaires.
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Ryan @ Impersonal Finance says
Personally, I know too little about bitcoin for any investment I make in it to be anything but pure speculation. I just don’t know if it will be able to survive government attacks on it, so right now I’m sitting comfortably on the sidelines.
I believe bitcoins are far too risky. and I’d stay away. Bitcoins were selling at $1,242 on 11/29, they are around $500 today – a decline of 60%.
– On 12/5, the People’s Bank of China announced that Bitcoins posed an unacceptable risk & banned financial institutions from using Bitcoins. The price of Bitcoins promptly fell by 30%.
– On 12/18, the Bank forbade third-party exchange of yuan (renminbi) for Bitcoins & China’s largest exchange ceased taking any new yuan deposits. The bitcoin market in China collapsed & has collapsed the market worldwide.