If someone told you about an investment that has made some people millionaires overnight, would you be tempted to invest? What if you were told that the same investment could lose most or all of its value overnight? This is the debate surrounding the digital phenomenon known as Bitcoin. Bitcoin is an alternative currency that exists strictly as digital code, and has received a lot of attention. If you’re wondering what all the fuss is about, here’s a brief introduction to Bitcoin, how it works, and some of the potential pitfalls it presents.
Bitcoin as currency
Bitcoin isn’t a company, but rather a virtual currency supported by a peer-to-peer, computer-based electronic cash system first outlined in 2009 by an anonymous person or group. Bitcoin is created by “mining,” using complex software to solve mathematical computations. Solving these problems creates so-called “blocks,” and the computer that solved it is rewarded with digital bitcoins. The number of solutions that can be discovered globally per hour is limited by the system’s software code. The eventual total number of bitcoins available to be mined is said to be limited to 21 million. However, most users acquire bitcoins by buying them with physical currencies or accepting them as payment for goods and services.
Advocates of Bitcoin argue that the advantages of the system are that, one, it’s not controlled by any government’s central bank, two, a global virtual currency facilitates global commercial transactions, three, every Bitcoin transaction is recorded in a public ledger, and four, the payer and payee are anonymous. However, some say that it is because of that anonymity that it is dangerous, as it has attracted charges that its chief use so far has been for illegal activities such as money laundering.
Just as a physical wallet holds paper money, a digital wallet stores the private software keys that are bitcoins. It makes or receives payments by communicating with the network of other Bitcoin wallets. In fact, some well-known merchants and services now accept Bitcoin as payment.
Speculating in Bitcoin
To say that Bitcoin as an investment is volatile is an understatement. Its value has fluctuated wildly as speculation and confidence in it have ebbed and surged. At the beginning of 2017, one bitcoin was worth about $1,000, and in March 2021, the price topped $60,000. In between, Bitcoin investors have experienced gut-wrenching price declines. As a result, the amount in your virtual wallet can fluctuate from enough to buy a Tesla or enough to buy a tank of gas.
Obviously, virtual currency still faces a lot of challenges. If you’re considering exploring Bitcoin, either for transactions or as a speculative investment, you should become far more familiar with it than simply relying on this discussion. And because of the issues outlined above, you should be prepared for dramatic price swings and only use money that you aren’t relying on for something else.
Written by Huntley Financial Services. For more information, contact Mark Huntley at 802-228-5774.