Bitcoin is one of the most exciting and high-profile investment opportunities available today. It can also be extremely lucrative. But with high rewards come high risks. Bitcoin only exists on computers, and it is not backed up or guaranteed by anything more than the users’ trust. It’s important to be careful with your money and investments; the higher the risk, the more time you should spend educating yourself.
I cannot overstress that this article is for information purposes only and is not financial advice. Please do not make any decisions based on what you hear from me. I am not a financial advisor and cannot help you in that area. If you want to invest in Bitcoin or other high-risk investments, I strongly suggest you speak with a professional financial adviser before buying anything.
If you like taking chances and can handle stress well, Bitcoin is one of the most exciting investment opportunities today. If you are careful, you could make a nice profit and enjoy learning about cryptocurrencies. Keep reading to find out more about when, why, and how to invest in Bitcoin.
- What Is Cryptocurrency?
- How Does Bitcoin Work?
- The Difference Between Bitcoin and the U.S. Dollar
- How to Buy Bitcoin
What Is Cryptocurrency?
Bitcoin was invented in 2008 and marks the beginning of the cryptocurrency era. It was the first cryptocurrency and, 13 years on, is still the most popular.
Bitcoin is, at a fundamental level, a sophisticated accounting ledger. It is special because there are copies of this ledger distributed over hundreds of thousands of computers, which protects them from being hacked or altered by unauthorized access.
The popularity of Bitcoin comes from the fact that it is easy to transfer, easy to store, and appears safer than many traditional currencies. There will also never be more than 21 million Bitcoin in existence, which means it cannot be inflated like the U.S. dollar. These facts make it easier for people to trust Bitcoin and use it for their transactions.
The first time Bitcoin was used to buy a product happened in 2010. Laszlo Hanyecz spent ₿10,000 on two Papa John’s pizzas. As of this writing, those Bitcoin are worth $573,097,900, making those the most expensive pizzas in history.
Since the inception of Bitcoin, hundreds of popular cryptocurrencies have emerged. Each one comes with its own advantages and disadvantages. It remains to be seen which ones will last and if Bitcoin will keep the top spot as the most popular.
You can buy Bitcoin with an app or specialty website, but there are other methods, as well. If you use one of the alternate methods then you will need a special crypto wallet to store it in. This is very much like a physical wallet with cash inside: If you lose it, it’s gone! That’s why most people use professional websites and apps and leave their Bitcoin on file with them.
How Does Bitcoin Work?
The transaction history of every Bitcoin in existence is maintained in an accounting ledger called a blockchain. When enough new transactions have been completed, they are organized into a file called a block and added to the end of the chain.
The people who maintain the copies of these accounting logs are called Bitcoin miners. They use a special algorithm to check each block for accuracy before it is allowed to be added to the blockchain.
Every miner has a complete copy of every Bitcoin transaction ever made. Anyone can be a miner, and conservative estimates say there are between 100,000 and 300,000 Bitcoin miners. If you want to be a miner, you simply download the software and run each new block through the algorithm. Your results are checked against the results of the other miners, and if yours is the same then you have successfully “mined” some Bitcoin. It’s simple in theory but requires powerful computers that can be expensive to buy and maintain.
As the government gets more involved, many people are hoping for a Bitcoin exchange traded fund (ETF) to be created. This is a popular investment tool used by investors who trade in commodities but who don’t want to take physical possession of the gold, silver, or other commodities they purchase. ETFs are also easier to sell when the time comes. There are no Bitcoin ETFs yet, but several have been proposed and are pending approval by the SEC.
If and when an ETF is approved, it will make investing in Bitcoin easier than ever. In theory, the formation of an ETF could result in the price of Bitcoin or other covered cryptocurrencies rising in value quickly. It could also lead to a crash in the price, so as always, let the buyer beware.
The Difference Between Bitcoin and the U.S. Dollar
At the moment, the U.S. dollar is the easiest way to make purchases in the United States. You can buy and sell Bitcoin with dollars, but it’s very hard to buy something using Bitcoin right now. You can buy a Tesla with Bitcoin, and there are other companies that accept cryptocurrencies, but they are not accepted by most merchants.
The U.S. dollar used to be backed by gold. That meant you could trade your dollars for a set amount of gold that never changed. Today, the U.S. dollar is only backed by the reputation of the United States. It has no value other than what people place in it. Bitcoin is the same in this respect, but it is not backed up by the United States. Bitcoin is backed up by a few hundred thousand computers and state-of-the-art encryption, and for now, it’s not considered as trustworthy as the dollar.
One downside to the U.S. dollar is inflation. Every year, the U.S. government collects trillions of dollars in taxes and makes trillions of dollars in expenditures, but it seems we always spend more than we take in. The last time the U.S. took in more money than it spent was 2001. When the government spends more money than it takes in, the difference is a rough estimate of inflation. So when the government runs a deficit, as it has for the last 20 years, the value of each and every U.S. dollar goes down.
When Bitcoin was invented, it was determined that no more than 21 million Bitcoin will ever exist. As a result, as Bitcoin becomes more popular it also gets more expensive. When those pizzas were bought in 2010, you needed 500 bitcoin to buy one dollar. Today, one Bitcoin is worth tens of thousands of dollars, so it’s much more popular than ten years ago.
How to Buy Bitcoin
My favorite way to buy Bitcoin is with the Robinhood Crypto investment app. Coinbase.com and Blocktrade.com are two popular websites that offer cryptocurrencies, and they are pretty easy to use, too. The Robinhood app is popular with new investors and retail traders who want to make tiny investments or just want to learn. If you are new to cryptocurrencies, it is probably best if you start small and use one of these trusted and well-known apps.
Ethereum is the second most popular cryptocurrency and is also available from most places where you can buy Bitcoin. The Ethereum value, however, is much lower than that of Bitcoin. Many savvy investors say it’s potentially better than Bitcoin, but for now, it has to be content with second place.
Some money-saving apps also offer investment options that can be used to buy Bitcoin. You may want to fund your first Bitcoin purchase by exercising some ways to make extra cash. That way, you’re not actually risking anything from your regular budget.
Many investment firms now offer different options you can use to invest in Bitcoin and other currencies. Charles Schwabb and E-Trade, for example, offer futures contracts on Bitcoin and other cryptocurrencies. Futures trading is for more seasoned investors, so if you are just starting out with cryptocurrencies, it would probably be better for you to use a specialized app.
I recommend you learn all you can before investing in Bitcoin. Please remember that I am not a financial advisor and this information is not advice. I’m here to talk about exciting new investments, but I am not qualified to advise you appropriately.
If you want to take the next step, please talk to your financial advisor so you can protect yourself. Most of all, remember to have fun and stay safe!