2017 has been the year of the cryptocurrency. Of course, the most famous is Bitcoin. It’s been all over the news recently, largely because its value has skyrocketed in a very short time. Since the focus of this blog has a lot to do with investing, particularly in alternative investments, I’d be remiss if I didn’t at least touch on the subject.
Now, making money from currency exchanges is nothing new. But with these new forms of technology, this exchange is happening at speeds never before seen, particularly because there is no government oversight. “What is cryptocurrency?” I hear you ask. Let’s break it down in this quick summary.
What is cryptocurrency?
To put it simply, cryptocurrencies like Bitcoin are a payment system without a central network. With Bitcoin and others, there is no Federal Reserve — the currency only exists in a peer-to-peer network. The benefit of this is that exchanges can be completely anonymous and don’t require a bank. That was the initial draw, at least. Now that more mainstream investors are taking notice, cryptocurrencies have become an asset on their own.
Bitcoin, specifically, is stored in a “wallet,” which is like a bank account, but is simply a collection of your Bitcoins (or partial Bitcoins).
What is Blockchain?
You might hear this word thrown around whenever references are made to cryptocurrencies.
Blockchain is the technology behind Bitcoin and other cryptocurrencies like Ethereum and Litecoin. Think of it as a digital, public ledger that records all of the transactions involving each of these currencies. The ledger is kept on multiple servers called nodes, and they’re constantly communicating to make sure that everyone has the same record. This confirms that you have the rights to that “money” and you can use it for the purposes of an exchange. Several confirmations have to happen before any cryptocurrency is actually exchanged.
How secure is it?
As with any online transaction, it’s possible for your cryptocurrency “wallet” to be hacked. The most famous of which is the story of Mt. Gox where hundreds of millions of Bitcoins went missing. Only a couple days ago, came this story where a hack resulted in $70 million worth of Bitcoin being stolen.
So if you decide to invest in Bitcoin, storing your currency in an encrypted location is very important. Currency can be stored online, locally (on a hard drive), or probably the safest, on a separate hardware wallet.
The transactions themselves (like when you pay someone), however, are considered quite secure.
Where can you buy it?
Well, there are numerous exchanges out, some of the more popular ones are Coinbase or GDX. Setting up an account is easy and free, and trading is fairly straightforward. Fees vary depending on the exchange, but some charge a base rate of 4% for all transactions.
Obviously, the greatest benefit of cryptocurrency, at least right now, is the potential for phenomenal returns. Over the past year, the price of a single Bitcoin has increased by more than $16,000. Other cryptocurrencies, like Ethereum and Litecion, have also increased in value over the last year significantly.
Then there’s the benefit of being able to use certain cryptocurrencies as actual currency, as more and more retailers–and even countries–are accepting them as viable tender.
Identity theft is also not really an issue with cryptocurrencies. With a normal credit card, it’s possible for that card to be stolen and/or misused. Bitcoin, for example, is based on a “push” system, only giving out the money that’s required.
As with any investment, cryptocurrencies come with risk. They are highly volatile, and while current trends are greatly positive, there’s no guarantee this will continues. Some financial experts say we’re in a bubble that will soon implode. Others, however, say that Bitcoin value could reach $50,000 by the end of next year. Really, though, all we have are educated guesses. After all, this kind of growth is unprecedented, even though some like to relate it to the dot-com bubble of the late 1990’s and early 2000’s.
So whether cryptocurrencies will revolutionize the banking system or flop due to not being backed by a government agency remains to be seen. But there are certainly very intelligent people in both camps.
Should you invest and should I have invested?
Now for the real question. Whether you should invest is entirely up to you, your financial goals, and your risk tolerance. Whatever you do, please do not invest something you can’t afford to lose. This is true of any investment, but even more so for cryptocurrencies like Bitcoin. I’m not the one to say, but should you be like this guy? Probably not.
You may be wondering if I personally have invested in Bitcoin. Well, I first heard about Bitcoin years ago, and I really considered investing about five years ago. The whole concept seemed fascinating to me and seemed like an emerging technology play. So I set up my account, linked my bank account, and was about to invest $5000 in it. I was going for it. Then, I decided to do just one last round of research . . . and I got scared off.
Well, as I write this (BTC=$15,800 USD), that investment would have been worth 5.6 million dollars. Is there a little bit of regret there? Oh, absolutely. However, a lot of assumptions would’ve been made to get me to this point. Who’s to say I wouldn’t have sold it off long before it reached this point? Or maybe they would have been hacked and stolen? Or maybe I would’ve lost it or thrown it away and lost it like this guy?
So I’ve had to make a conscious decision not to purely chase out of regret and FOMO. I did decide to invest a small amount so that I could understand the market a bit. Nothing makes you learn something as when you have something at stake. I’ll talk about this in a future post.
At the end of the day, there are just way too many factors for me to even try to give advice on whether or not to invest. Again, I can tell you to not invest because of the hype. If you want to learn about it, that’s one thing. You have to be able to stomach the wild swings and be okay with losing it all.
Otherwise, you’re better off investing conservatively and continuing to focus on creating additional streams of income that provide steady cash flow.
“Passive Income, MD” is a physician who blogs at his self-titled site, Passive Income M.D.
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