In one of my recent posts, “The Right Ways To Time The Market,” I briefly skimmed through the cryptocurrency topic. The main reason for doing so is that I have limited knowledge in this area. Furthermore, my investment philosophy is to only invest in vehicles that I understand and have a sound grasp of it. Truthfully, with all these headlines and volatility, I think that bitcoin or any of the cryptocurrencies are more of a gamble rather than an investment.
Regardless of what my biased view is, we can always learn about these cryptocurrencies to improve our knowledge. With that being said, I’ve decided to do some basic research to help myself and my readers get a better understanding of all the cryptocurrencies euphoria that’s going on now. After reading this post, you can then decide for yourself if bitcoin is an investment or a gamble. Let’s dive in.
An Overview Of Bitcoin As An Investment
Bitcoin has been a big story in 2017, though it’s still somewhat easy to ignore as a currency. Those who predicted that it would quickly supplant ordinary currency have been proven wrong. However, the actual value of bitcoin has grown tremendously. Therefore, while we can for now largely ignore it as usable currency, many people are beginning to pay closer attention to bitcoin as a form of alternative investment, and a means of diversifying a portfolio.
I won’t advocate for or against this idea because bitcoin is still a relatively new concept and it’s difficult to see where the market’s going. But here are some of the things you should know if the idea interests you.
What Bitcoin Is
An article proclaiming to explain bitcoin in layman’s terms put it in the simplest terms possible: bitcoins are a form of virtual currency, meaning if you have bitcoins you don’t physically purchase goods, but rather conduct electronic transactions. More practically speaking, bitcoins are essentially lines of code with monetary value that can be transferred from one user or source to another. You can buy bitcoins through an exchange (commonly done now via app or desktop program), and then control how and when to use them (or where to send them). One important distinction to keep in mind is that when you see it written as “Bitcoin” with the first letter capitalized, the writing may be referring to the entire system or Bitcoin network; the word without capitalization refers to the actual digital currency. As for how it should actually be handled, read on!
How Bitcoin Storage Works
When you buy bitcoin through an exchange, it is transferred to your bitcoin wallet – or at least, that’s the easy way of putting it. In reality, no such substance as bitcoin actually moves into your possession. What you store instead are the secure digital keys used to access addresses and sign transactions. The bitcoin you’ve purchased simply exists at an online address; your secure digital keys are yours alone, however, and allow you to control what that bitcoin does. You can sell it, use it to purchase something or, for purposes of long-term investment, hold it in your wallet for an extended time. Also of note is that there are multiple forms of wallets, divided into two categories: hardware and software. Hardware wallets store keys on devices (or even paper) that aren’t connected to the internet (“cold storage”). Software wallets are online programs or apps.
What Impacts Bitcoin Value
This is one of the big questions involved in bitcoin investment, and it’s one for which I don’t necessarily have concrete answers. When you deal with an ordinary stock or asset that’s been around for years, there tend to be clear patterns and known indicators that can tip you off to movements in value. Bitcoin is still new though, and it’s not as easy to say what impacts the value. However, I do have a few ideas. For instance, multiple analyses have concluded that Japanese men are behind the surge of late, perhaps in part thanks to Japan easing regulations on cryptocurrency exchange earlier this year. We also know that when a major exchange tool or wallet system becomes available to a new group of users there can often be a spike in activity. And many are also predicting that major financial crises could conceivably lead to bitcoin booms in much the same way gold has been boosted during such times in the past. So, broadly speaking, we can say that government regulations, available tools, and broad economic trends could all impact the value.
Recent Bitcoin Trends
Frankly, the recent trends in bitcoin probably won’t do you much good as an investor, because the digital currency has been both incredibly volatile and incredibly robust of late. In late September, bitcoin crossed the $4,000 threshold; by October 31st, it was over $6,000 and climbing; December 1st saw the price over $10,000, and in the middle of the month it hit a new high just under $20,000. In the midst of this sharp climb, however, there have been times when the cryptocurrency’s value has plummeted by more than $1,000 in a single day. Furthermore, a lot of sharp investment analysts believe bitcoin is currently in a massive bubble (and thus due to fall off significantly). Time will tell, but right now the recent trends are almost too crazy to draw much from.
My Two Cents
With any types of investments, the higher the potential for greater returns the greater the risk and volatility. Before you invest in these high flyers, just be aware of one thing, “the faster it goes up, the pace is even faster when it comes down.” Play it smart and make sure that you have a full understanding of the ins and outs before you invest in any of these cryptocurrencies.
So readers, what’s your view on cryptocurrencies? Do you have the risk tolerance to stomach the volatility and invest in cryptocurrencies?
Note: This post is a collaborative post. Please read my disclaimers for more information.