Should You Invest in Bitcoin?
If you invested in Bitcoin back in 2009, congratulations. For the rest of us, there are a lot of risks to consider.
Everybody is talking about Bitcoin! Seriously, everybody.
Your plumber? They’re talking to you about Bitcoin while they’re under your sink, fixing the pipes.
Your dog? They’re talking about Bitcoin, but you can’t understand them because they’re, you know, a dog.
Your doctor? They’re talking to you about Bitcoin while they’re performing surgery to remove your appendix, but obviously you’re asleep so you don’t hear them either. Feel better soon. We hope you get the flowers we sent!
All this Bitcoin jibber-jabber probably leaves you wondering whether you should be spending some of your physical coins on Bitcoins, or whether you should run away as fast as possible.
To give you some insight on that, we talked to even more people who are talking about Bitcoin. And unlike your dog, plumber, doctor, they actually know stuff about it.
Okay, so what is Bitcoin?
Now it’s time to answer the question that your parents keep asking you, that you sort of pretend to know the answer to, even though you pretty much don’t: What is Bitcoin?
Obviously, the short answer would be “internet money.” It’s money, like how a dollar is money, and it’s all on the internet.
But the real answer is just a teensy bit more nuanced than that. As certified financial planner Billy Funderburk explained to us:
“Bitcoin is a form of digital currency that utilizes cryptography to regulate how and when units are created as well as to safeguard secure transfer of funds. Bitcoin is just one of many so-called cryptocurrencies. Ultimately, the increasing value of Bitcoin comes from a belief that the demand for bitcoins will increase over time. This belief is rooted in the idea that it will replace many government-sponsored currencies for more and more transactions.”
Bitcoin functions based on the “blockchain” technology created for the maintenance of its ledger, and we’ll direct you to this explainer from the good folks at Lifehacker if you want to try and understand the technology more.
Bitcoin was created in 2009 by a person calling themselves Satoshi Nakamoto. (Nakamoto’s real identity has yet to be uncovered.) People can “mine” Bitcoin through a process that basically has a computer solve a series of really difficult math problems. Once someone owns Bitcoin, they are provided a password to access it on the blockchain. Lose the password, and you lose your Bitcoin.
Unlike American dollars, Japanese Yen, or any other kind of traditional, country-based currency, Bitcoin has no government body controlling it. It’s blockchain or bust. For some people, the lack of a regulating body means they see Bitcoin (and other cryptocurrencies that have followed in its wake) as the future of money. For others, the lack of control means they see Bitcoin as, at best, a collective delusion, and, at worst, a total scam.
So should you invest?
Do you own a time machine capable of going back to 2009? Then the answer is yes, absolutely, go back and get as much Bitcoin as you can—but you didn’t need us to tell you that, as you’ve already bought all of Earth and are ruling us as your king. Or at least you would be if you had cashed out last December.
If you don’t have a time machine, the answer is a little less clear.
“First, we should discuss whether you would be investing or speculating,” Funderburk suggested. “Due to the volatile nature of the price as well as the unlikelihood of Bitcoin replacing a national currency, it is my view that the price is behaving like a speculative bubble. Should a person invest, I would suggest investing only a small portion of your money and have an exit strategy.”
When Funderkurk talks about the “volatile nature” of Bitcoin’s price, he’s not playing around. The original Bitcoins mined in 2009 were worth about six cents each, and it’s value peaked in December 2017 at nearly $20,000 before losing almost half its value by mid-January 2018. That’s a rollercoaster ride.
Sure, owning a $10,000 Bitcoin that you bought for six cents is still a ridiculous return on your investment. But a currency that loses almost half its value in only a month? That’s as volatile and as risky as an investment can get.
There is one benefit to all that volatility though, and it’s that there are fairly easy profits to be found via day trading.
“It may be too late to simply buy Bitcoin and wait a year for a 10,000% return on your investment,” John Omar (@johnomarkid) cryptocurrency trader and blogger at Chain Operator, told us. “However, it’s not too late to earn serious profit day trading Bitcoin and other cryptocurrencies. Day traders take advantage of the daily price volatility in cryptocurrencies, where the price often swings 5-10% in a few hours. Earning just 1% profit daily on a $1000 investment for a year and compounding the gains will land you $37,000.”
You (probably) shouldn’t invest—especially right now.
So what do the experts say?
“There was a great New York Times article about the Winklevoss Twins, who bet their investment fund on bitcoins. Their 25,000% return is incredible but so is their recent meteoric fall, realizing a paper loss of $443 million. To say that bitcoins are speculative and volatile is an understatement. At least for the Winklevoss Twins, the cost basis was $10/coin back in 2012. But for any non-accredited investors to plunge into bitcoins now at today’s inflated prices would be not only unwise but outright foolish.”
But once the Bitcoin bubble bursts…
“Does that mean we should never invest in bitcoins? No,” says Amyx. “The point is that investors need to start from the perspective of holistic asset allocation and appropriateness to their risk profile. Until there is a substantial market correction, it’s a bubble waiting to burst—and with it, many people will lose a big portion of their (Bitcoin) savings.
“One of the best pieces of advice I ever received was, ‘if you hear your family members, taxi drivers, or neighbors talking about an investment, you know that it’s time to get out!’”
Finally, there’s Max Galka, a lecturer who runs the crypto analytics platform Elementus (@elementus_io). He’s even more optimistic on Bitcoin, but still advises major caution: “Bitcoin has had an incredible run, but that doesn’t mean it couldn’t continue to rise a whole lot more. At current prices, all the cryptocurrencies in the world (Bitcoin and all others) have a total value of about $600 billion. To put that number in perspective, the global supply of physical money (coins and notes) is over $30 trillion. If cryptocurrencies are the money of the future, their value could theoretically increase by another 50x.
“That said, cryptocurrencies are a very risky investment. Not only is there a chance the technology fails and the price falls to zero, but you are also subject to the risk of hacks, theft, and code exploits, which could wipe out your investment overnight.”
And how do you invest?
Assuming you’re still interested and aware of the risks, how exactly do you “get into” Bitcoin?
“Getting started on investing in crypto is like anything else you’re investing into,” Hyun Lee (@HyunLee), communications and marketing director for Mothership Foundation, told us. “Do your own research. Hear what people are saying, but formulate your own opinion. Get on an exchange—maybe they have a demo environment you can try out. Learn the ins and outs of the exchange and markets.”
“Investment into Bitcoin is speculative, in that as a currency there is nothing backing it other than the belief it has value. Thus, it’s important to never invest more than you can afford to lose.
“If you do choose to invest in Bitcoin and it appreciates in price, it’s always smart to sell enough Bitcoin to cover your initial investment. That way, everything left is profit. At this point you’ve reduced all of your risk, and you’re in a situation to make more logical and less emotional investment decisions going forward.
There you have it. Sadly, you probably missed the big boat, but maybe there are some smaller boats you can still consider. And if you ever do hit it big, don’t forget us!
If you want to know more about long-term financial planning, check out these related pages and articles from OppLoans:
- From Budget to Baller: 6 Tips to Grow Your Money
- The ABC’s of Saving
- Good Personal Finance for the Long Term
|Scott Amyx (@AmyxIoT) is the author of Strive: How Doing the Things Most Uncomfortable Leads to Success, which has been endorsed by Tony Robbins, Forbes, Singularity University, Tribeca Film Festival and other influencers. He is a global thought leader and venture capitalist who has appeared on TV, TIME, Forbes, NYT, TechCrunch, CIO, Washington Post, Wired, Forrester, G20 report and other major media.|
|Cal Cook is the Consumer Finance Investigator at ConsumerSafety.org (@ConsumerSafetyO). His passion for digital technology, scams, and identity theft drive his research.|
|Billy Funderburk is a Certified Financial Planner™ and operates an independent wealth management & financial planning practice in Longmont, Colorado.|
|Max Galka is a data scientist and information designer based in New York City. He runs the blockchain transparency platform Elementus (@elementus_io).|
|Hyun Lee (@HyunLee) is the Communications and Marketing Director at Mothership, a blockchain ventures platform and digital assets exchange. In June 2017, Mothership held a successful token sale and since then, is changing how exchanges work.|
|With his company Bitfountain, John Omar (@johnomarkid) taught over 100,000 students how to code. After the company had run its course, he feared getting an office job and losing his freedom. He took a year off to teach himself how to day trade cryptocurrency for profit. John has now built a large online community of traders that he teaches his trading strategies to through his course videos, private forum, and blog.|