A fever has gripped the United States. Nay, the World. But this isn’t your typical winter illness. Instead, this fever is about a certain digital currency, otherwise known as cryptocurrency, called Bitcoin.
Bitcoin is on the tip of everyone’s tongue. From big Wall Street investors to your family friends, everyone either wants in or says that it is a bubble and a waste of time. But who is right? Neither side knows for sure, so last week, I decided to see what the hype was all about.
I bought $100 of Bitcoin and I don’t care what you think
In the last month, Bitcoin (BTC) has increased in value by about 120%. In the last year, it is up 2,000%.
That is insane.
The current price as of this writing (December 16th) has spiked again to over $18,500. In any given day, the price can fluctuate thousands of dollars, leading to a roller coaster ride of emotions if you own any Bitcoin.
This volatility is part of the reason many of the biggest names in finance doubt it’s value.
Jamie Dimon, CEO of JP Morgan Chase, has called it a fraud, and said that if you are “stupid” enough to buy it, you’ll pay the price one day. Warren Buffett warned investors to “stay away” from it, calling it a “mirage”.
But I don’t care what they have to say. Sure, they are two of most powerful leaders in finance, but what do they know? (A lot, but that is besides the point.)
After conversation, some research and temporarily forgetting I am an index-fund-only type of investor, I purchased $100 worth of Bitcoin.
$100 bought me a whopping 0.00556985 BTC.
I did this out of sheer curiosity, fully prepared for the roller coaster ride that awaits me.
So… What is a Bitcoin?
Bitcoins are a form of cryptocurrency, or digital money. Meaning, unlike other currencies, it cannot be withdrawn from an account in the form of physical money.
It is 100% digital.
Some retailers, such as on Overstock, Expedia and Newegg, are beginning to accept it as a form of payment. However, given the price volatility, many view it more as an asset instead of a currency.
Consider this example of using Bitcoin to buy goods or services: Today you buy a $500 laptop on Newegg using your Bitcoin. Tomorrow, Bitcoin’s price skyrockets, doubling overnight. That $500 laptop now feels like it cost you $1,000. On the other hand, the price could drop in half and you would have landed a deal.
Given the unpredictable nature of Bitcoin, either can happen and no one can predict it.
If Bitcoin were to ever stabilize, there would be potential in its use as a currency. However, for the time being, the wild price fluctuations make that untenable.
There is also this thing called Blockchain
Blockchain is the technology behind Bitcoin, and other cryptocurrencies, that people are most excited about.
A blockchain is a public ledger that has all the transactions of anyone using Bitcoin. Each transaction with Bitcoin creates a “block” (verifiable transaction) that is added to the “chain” (ledger) in chronological order.
Each transaction occurs without central bookkeeping and without any intermediary, setting it apart from every other form of currency.
Personal information like a name is never recorded in the blockchain. Instead, everyone receives a digital wallet number and the transactions occur between those numbers only, making it nearly untraceable.
But an investment in Bitcoin is not an investment in blockchain technology.
In truth, I am skeptical that Bitcoin is an investment at all.
It is a speculative bet, not an educated investment
I view it like gambling, and I don’t really gamble. Each year I put $100 into a fantasy football pot and buy some squares during the Super Bowl, but that is the extent of my betting.
The current price volatility of Bitcoin is why I do not view it as an investment now. I am curious about its future and the future of blockchain technology, but do not believe that Bitcoin’s be a key pillar in your investment strategy.
With all of that said, before rushing off to buy any Bitcoin, please consider your financial position.
Are you scraping by each month and every dollar counts? Stay away.
Are you solidly in the middle class, with a few dollars to spare? Perhaps you spend $100 in a typical weekend grabbing dinner and drinks with friends. Go ahead, spend that $100 this weekend on Bitcoin instead, but understand the risks, and recognize you could lose all of it.
Are you firmly in the upper or very upper class with thousands to spare each month? Do what you want, but not before ensuring you have your retirement plans in check.
A good rule of thumb is to invest no more than 1% of your net worth in Bitcoin or other cryptocurrencies. That is a recommendation I can get on board with.
And please, whatever you do, do not funnel your entire retirement account into Bitcoin or other cryptocurrencies.
That may be an option someday, but that day is not today. That is not a financially sound decision whatsoever, and it isn’t even close.
Don’t be afraid of cryptocurrencies. It is worth your time to understand them. Just don’t bet the farm yet.