Bitcoins (and other cryptocurrencies) offer investors and users a new currency option in which they can collect payments and pay for goods and services using cryptography. This advanced encryption technique first became a reality in 2009 and it’s now a major force in the global financial market.
The value of bitcoins has risen and fallen over the years. At its height its market value was over 2 billion dollars and although it fell from that level, it has been creeping steadily back upward, spurring a spirited debate over its usefulness and effectiveness as a currency for consumers and investors.
The question is, will cybercurrencies such as the bitcoin become widely used? Are they a passing fad? Will the value remain steady? Rise? Fall? Or, are cryptocurrencies a passing fad that can bankrupt those who rely on their use?
Bitcoin is a form of digital currency whose development is based on mathematical proof. Users access bitcoins which have been “mined” and hold the currency electronically. There are no 3-dimensional bitcoins – everything about this electronic payment system is archived in cyberspace including accessing bitcoins, using them and investing in their future.
Bitcoins were developed by Satoshi Nakamoto, a software developer, who proposed the new payment system that was independent of any central authority. Nakamoto envisioned that users would be able to transfer bitcoins easily without anyone charging high transaction fees.
Bitcoins are “mined” by “miners” who use software programs that crunch numbers and solve complex algorithms within a distributed network. This network also processes transactions that are made with the bitcoin currency.
According to the bitcoin protocols there is a finite number of bitcoins – 21 million. After those bitcoins have been mined, no new bitcoins will emerge. However, each bitcoin can be divided into smaller parts, the smallest divisible amount being one hundred millionth of a bitcoin (a ‘Satoshi,’ named after the bitcoin inventor).
Every bitcoin transaction is recorded in a public record known as the “blockchain.” Transactions are secured through military-grade cryptography.
Who Uses Bitcoins?
To start collecting and using bitcoins, users download a bitcoin wallet on any desktop computer or mobile device. They can then start trading dollars for Bitcoins on a bitcoin exchange. Once the bitcoins are in the wallet, the individual can start spending the bitcoins at merchant sites that accept bitcoin payments. .
Bitcoins are being used by increasing numbers of individuals and businesses. Some of the companies that accept bitcoin payments include web design programs such as WordPress, global charities, ecommerce sites, online casino venues, tax preparation software services, mobile phone companies and travel companies.
Users choose to make transactions with bitcoins for a variety of reasons. These include:
- Taxes – there aren’t any mechanisms by which a third party can intercept or track bitcoin transactions. Therefore, at this time, it’s virtually impossible to track bitcoin income. That may change in the future – in November 2017 a U.S. court ruled that Coinbase, the bitcoin wallet manager, must turn over identifying information on 14,000 accounts. The IRS views bitcoins as property, not currency. In the future, observers expect that IRS investigators will be increasing their focus on bitcoin investors to make sure that Uncle Sam gets his cut of the pie.
- Third-Party – No one can seize bitcoins since there are multiple redundant copies of the transactions database. The user may be forced to send the bitcoins through other means (for instance, if the IRS demands payment, they can seize other assets to force payment) but the bitcoins themselves are protected.
- Transaction Costs – You can send and receive Bitcoins without incurring significant transaction charges. Users keep the Bitcoin client running and, in that way, contribute to the network where transaction costs are shared. The sharing reduces the transaction costs tremendously to the point that they are negligible.
- Safety – bitcoins can’t be stolen. Only the owner can change the address of the bitcoin. Unless a thief gains physical access to a user’s computer and has the data needed to make a transfer to their own wallet, the user’s bitcoin wallet is safe.
Should you Invest in Bitcoins?
Financial consultants tend to be conservative in their advice, meaning that many will try to discourage clients from investing in bitcoin. They cite the bitcoin’s volatility, bubble-like behavior in which the value fluctuates wildly and lack of obvious usefulness, other than as a vehicle for investment.
However, many investors have made a fortune by investing in bitcoin and, since the cybercurrency hasn’t even begun to hit its peak, it’s likely that there’s a lot of opportunities left for investors. This year alone, bitcoin has outperformed the stock index or any other asset that is available for investment and there’s no reason to believe that the upward climb won’t continue.
Some bitcoin proponents believe that the financial establishment has a vested interest in discouraging bitcoin investments. They say that the blockchain – the underlying bitcoin technology that facilitates bitcoin transfers from one user to the next – disrupts and threatens the existing business model. They say that this is the time to invest in bitcoins, when it’s new and its possibilities are endless.
On the other hand, there are good reasons to be wary about bitcoin investment:
- Value of the Investment – Most investments – be they in real estate, stocks and bonds or in a specific company or project – have, as the goal, the objective of generating cash for the investor. Investing in bitcoins can only result in the value of the bitcoin going up in relation to the U.S. Dollar.
- Security – bitcoins are viewed as a secure currency. It’s hard to steal bitcoins. But not impossible. Traditional investments may lose value if the principal decreases in value. However, if you invest in a cryptocurrency, you can lose your entire wallet if the price tanks. Other forms of bitcoin loss have occurred in the past through theft, technology glitches and lost log-in information.
- Diversification – Historically, bitcoin investors lose more than they gain. Investment advisors suggest focusing on long-term, low-cost investments. When you invest in a volatile scheme you stand more of a chance of losing big.
How to Invest in Bitcoin
If you want to give bitcoin investment a go, find a company that buys and sells bitcoins. Coinbase is the largest and best-known bitcoin trader. Open a coinbase wallet and link your bank account to that wallet.
There’s also an option to buy bitcoins automatically through your bank account (if you live in a country that allows this type of transaction).
Then, watch the exchange to see how your investment is faring.