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Unless you’ve been living under a rock for the past five months, you’ve heard the term bitcoin—and you’ve also probably heard how its price skyrocketed in the final months of 2017 and plummeted in the start of 2018. Bitcoin is digital currency that was created in 2009. It is accepted by over 100,000 retailers (although no big names yet), and the transactions are made anonymously, bypassing banking institutions and governments. But lately, most of the hype has been from investors who’ve watched the value of bitcoins surge from $1,000 per coin to almost $20,000 per digital coin—and then down again to $11,000 in a matter of days.(1)
Some think it’s another get-rich-quick scheme. What does that mean for you and your investments? Are bitcoins and other cryptocurrencies the next big thing, or are they just a passing investing fad you need to steer clear of?
Let’s find out.
What is Bitcoin?
Bitcoin is the most widely-known type of cryptocurrency, or digital currency. There are no bills to print or coins to mint. It’s all done over the internet using complex computing and coding. Like gold, bitcoins are worth what people are willing to pay or exchange for them.
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There are currently over a thousand other cryptocurrencies floating around the internet, all of which play off of bitcoin’s concept of an anonymous and nation-less digital cash. Some of the others include Ethereum, Ripple and Bitcoin Cash, a totally different currency despite its namesake. However, none are as widely accepted as their prototype, bitcoin.(2)
How Does Mining Bitcoin Work?
One way people can get bitcoins is by "mining" them. It’s kind of like a videogame: Developers compete to answer difficult math puzzles to win more bitcoins through specialized software. While there are currently about 12 million in circulation, the creator limited the overall supply to 21 million. So, the race is on for these "miners" to use increasingly powerful software to get bitcoins.(3) Yes, this is as complicated and technical as it sounds.
And what determines the ever-volatile price of these bitcoins? Basically, whatever buyers are willing to pay. Without a governing authority—like we have for nationally based currencies or the correlation to earnings like we have for stock prices—it’s really up to buyers. This is another huge risk of the cryptocurrency world. The lack of a consistent pricing tool is one of the major reasons we are seeing such huge swings in bitcoin’s worth.
How Do Bitcoins Work?
Bitcoin users exchange these digital "coins" for goods and services or trade them for cash. You pay electronically using a computer or mobile app, sort of like sending money via PayPal. Both bitcoin mining and trading are handled anonymously, making the cryptocurrency scene prime for cybercrimes, like phishing and blackmail schemes. All that, combined with the fact that bitcoin is not regulated by any bank or tied to any country, makes for a scary combination.
However, bitcoin recently gained credibility when a large financial firm created a futures exchange for the currency. (A futures exchange is just fancy investment lingo for a central marketplace for buying and selling futures contracts.) A futures contract obligates a buyer or seller to buy or sell a certain type and amount of an asset (like gold) at a certain price. Depending on what people are willing to pay for these assets, futures contracts help determine the value of that asset.
More large investing firms are expected to launch bitcoin futures exchanges, including New York’s Nasdaq.(4) Applications are even being filed with the Securities Exchange Commission to approve bitcoin associated ETFs (exchange-traded funds).(5)
How Do You Buy Bitcoin?
To actually purchase a bitcoin, if you are willing to take on the risk, you only need a digital currency account, like Coinbase, CEX or Kraken. These accounts act as a digital wallet similar to a PayPal account. Once you’ve uploaded your information and money, you can buy bitcoins. This process is actually scarily easy.
Here’s the question you’re probably asking: How can something that only exists in the digital world be used to purchase items in the real world? You’re not alone. Many of the country’s top financial minds are voicing the same concerns:
"(Bitcoin) is not a stable source of value and it does not constitute legal tender. It is a highly speculative asset," said Janet Yellen, the chair of the Federal Reserve.(6)
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Warren Buffet plainly states that, "In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending."(7)
Related: For more on bitcoin, listen to Chris Hogan’s Podcast, Bitcoin: Is it Worth Your Risk?
Should I Invest in Bitcoin?
Regardless of warnings like these, as bitcoins continue to increase in price, they will become more popular with some investors. And as they become a more accepted investment, bitcoins may eventually be regulated as an actual currency. Will this help bring stability to the bitcoin market?
Right now, nobody knows. And I’m not willing to bet my retirement on it. Here’s my stance: Bitcoin falls under the "Don’t invest in something just because it’s hip, cool, or trendy" rule. If it’s too hard to understand how an investment works and how its value rises and falls, steer clear!
Will this help bring stability to the bitcoin market? Right now, nobody knows. And I’m not willing to bet my retirement on it.
Instead, invest your hard-earned money in stable, long-term investments that consistently perform well—not unstable, trendy, high-risk schemes. When you invest, you have to think long-term and wait patiently for your portfolio to grow over decades, not days!
What Should I Invest In?
I recommend partnering with a financial advisor, whether you’re just starting to learn about investing or you’ve been investing for years. I know all about investing, but I still work with a financial advisor!
Find an investing pro today to start your investing journey!
About Chris Hogan
Chris Hogan is the #1 national best-selling author of Retire Inspired: It’s Not an Age. It’s a Financial Number and host of the Retire Inspired Podcast. A popular and dynamic speaker on the topics of personal finance, retirement and leadership, Hogan helps people across the country develop successful strategies to manage their money in both their personal lives and businesses. You can follow Hogan on Twitter and Instagram at @ChrisHogan360 and online at chrishogan360.com or facebook.com/chrishogan360.