Are you investment savvy? If so, good for you! I have great respect for people who have a natural aptitude for numbers and percentages and all-things-financial. I’m not one of them, but admire those who are. What I do have, however, is an intense love of learning. The specific topic doesn’t particularly matter. I just love to learn. Those who know me in person might tell you that I spend an exorbitant amount of time reading, researching and studying. They’d be right. One of the things I’ve been studying about of late is Bitcoin. Again, I am NOT a financially or investment-minded person. I do have somewhat of an entrepreneurial spirit in me, though, so it behooves me to learn as much as I can about such things.
I have several friends who have invested in Bitcoin. (Don’t worry. If you’ve never heard of it, just stick with me in this post and you will hopefully gain a basic understanding by the time you reach the end.) It’s a decentralized digital form of cash. (Wait, what??? Digital cash? HUH???) A lot of high-powered people have launched a campaign against this type of cryptocurrency . (That’s another term that refers to Bitcoin and other, similar systems.) From what I can tell, most of the naysayers are either bankers or government officials. I assume that they don’t like the idea because the system pretty much eliminates the need for intermediaries, such as banks and governments. lol The goal of this post is to provide basic information about what Bitcoin is and isn’t. It will hopefully give you enough to go on to spark your own interest to learn more and, perhaps, even to invest. (I haven’t done that yet but am definitely considering it.)
What exactly IS Bitcoin?
As mentioned earlier, Bitcoin is a form of digital currency. But, what is that? It’s basically a money-like asset that exists in electronic (digital) form. There are several types of digital currency, including cryptocurrencies and decentralized digital currency, as well as central bank digital currency. Think of this post as a 101 class, sticking to the basics. Just know, for now, that Bitcoin is decentralized digital currency, meaning that transactions occur through a peer-to-peer network without government or bank oversight, although you must link your initial investment to a bank account. However, beyond that, the bank has no oversight over your transactions.
This type of currency is a form of “fiat money,” which means that it’s not backed by gold or silver. It’s value is determined by credit worthiness. In other words, supply and demand determines its value. Each unit (for lack of a better word) is, in fact, a file stored on a smart phone or in “digital wallet” on a computer. A blockchain powers the transactions. A blockchain is an open-source code that creates a shared public ledger (think: permanent record) of every transaction. You can secure transactions through “keys,” either private or public.
Bitcoin miners confirm transactions
Within this decentralized digital currency community are people known as “miners.” (They’re also sometime referred to as “nodes.”) They are owners of high-speed computers. Their job is to independently confirm each transaction. They are compensated with bitcoins for their work. You can become a miner, but it requires you to invest in a sophisticated, high-powered computer system.
In simple terms, how does it all work?
The easiest way to explain the system is to say that you invest cash in exchange for a fraction of a bitcoin. You can then make purchases from merchants or peers who agree to accept this form of currency. Remember that value of a “unit” fluctuates according to supply and demand. When you invest cash, you’re taking a risk that the value of the fraction of the bitcoin you receive will increase in relation to the U.S. dollar in the future. You can transfer bitcoins to anyone at any time, anywhere. There are even bitcoin ATMs.
As you research this cutting edge form of digital currency, you’ll learn that there are various terms that refer to types of “wallets,” or places where you can store bitcoins. For instance, you can store your currency in a digital cloud and access it through a desktop PC, a browser or an app on a smart phone. If you prefer, you can also transfer bitcoins to a device (like a thumb drive) that you can carry with you. It’s important to research “wallets,” to become familiar with the terminology and to ensure that you understand the differences between the various types of storage.
How much is one whole unit worth right now?
At the time of this writing, a single bitcoin is worth $60,992.20. Remember, when you invest, you are investing in fractional amounts. You might decide to pay $100 for your initial investment. You would receive the fractional equivalent of value in ratio of the current worth for one bitcoin. Make sense? Using the current value at the time of this writing, if you were to invest $100, you’d receive 0.0016 of a bitcoin in exchange. However, as time goes on and the value (hopefully) of a whole unit increases, your 0.0016 that was equivalent to $100 U.S. dollars at the start, would be worth more in U.S. dollars down the line.
Benefits of investment
Getting down to the bare bones of it all, the following list shows the “pros” of investing in decentralized digital currency:
- No government or bank oversight
- Private, secure transactions, anytime, anywhere, with anyone
- Fewer potential fees
- Transactions not tied to personal data or information
- Reduces chances of identity theft
Those who pooh-pooh the idea of decentralized digital currency say there are several possible downsides, including these issues:
- Some wallets are considered potential targets of hackers
- Use limited to companies that accept this form of payment
- Not covered under investor insurance
- Scammers are out there (Example: Average Joes saying, “Pay US and we will invest for you!” Don’t fall for this!)
There are typically four ways to buy bitcoins. You can purchase through a cryptocurrency exchange, such as Coinbase. There are also numerous investment brokers offering this type of currency investment. You can purchase bitcoins through miners or from peers.
Many people hesitate to get in on this trend, stating that it is a speculative and volatile investment (unpredictable). Others say it’s safe enough, as long as you don’t investment more than 10% of your overall financial portfolio.
If you’ve already invested in bitcoins and want to share your experience, we’d love to hear about it!