It has been just six years since Bitcoin appeared, bringing a digital disruption to the concept of currency as we know it. Bitcoin’s disruptive powers have extended far beyond the currency markets, reaching deep into the financial industries, due to the technologies utilized by Satoshi Nakamoto in the creation of what is generally recognized as the world’s first digital currency. Most notable of those technologies is the block chain.
A remarkable technological achievement, the block chain is a distributed public ledger, permanently recording all transactions within minutes, updating and storing information via networked nodes in continuous communication. Bitcoin ownership is recorded in an unbroken chain from the current owner all the way back to the very first one.
Bitcoin’s block chain technology has been shown to be adaptable to many financial industry applications, including peer-to-peer lending and real estate transactions. The technology used to create the block chain has helped to facilitate the world’s first digital securities, a step toward the decentralization of financial instruments.
Yes, indeed, Bitcoin and its associated technologies have brought serious disruption to the financial world. It is, however, a good disruption, helping to open up investment opportunities to a much wider range of people, much to the consternation of financial industry gatekeepers. It’s no wonder, then, that so many people are interested in investing in Bitcoin.
Editor's Inflation Warning: "Investors are woefully unprepared for what may be a once-in-a-generation shift in the market"
However, it should be noted that there is a certain degree of Bitcoin price volatility, as there is with anything new and so potentially far-reaching, something that should be taken into consideration by potential investors. This type of investment does have a role in a well balanced investment portfolio, but isn’t an investment for those with a low risk tolerance.
Make A Direct Investment
The simplest way to invest in Bitcoin is to buy the digital currency and sell it at a profit. However, before you do that, you’ll need to get yourself a wallet – a place or an account to store your Bitcoins. You can store them on your computer, on a computer that doesn’t have Internet access or use cloud storage to ensure that something that harms your computer, like a virus, doesn’t harm your Bitcoins. You can find free or low cost wallets, but security is vital and there is no FDIC protection for this digital currency, so make sure whatever wallet you choose has the capacity to keep your Bitcoins safe.
Once you have your Bitcoin wallet, you can make your Bitcoin investments. When deciding how much money to invest, it’s important to remember that Bitcoin has experienced some wild price volatility. Early in the spring of 2011, the Bitcoin was worth $1 US. By April 2013, the value of a Bitcoin had risen to $266. Later that year, at the end of November, the Bitcoin price climbed to $1250. During the following month, the price dropped precipitously, falling to $600, then bounced back up to $1,000.
That cycle, falling and bouncing without quite making it back up to the price point it fell from, continued through 2014, hitting a low of $178 in January of 2015. Since then, the price has been rising and falling, but seems to be gradually creeping back up. As September faded into October, the price of a Bitcoin hit $239. These price fluctuations can be a great opportunity for the well-informed, careful investor. Bitcoins can be bought from individuals or from Bitcoin exchanges.
In the most fundamental sense, Bitcoin exchanges are simply a place, virtual or otherwise, through which people can buy and sell Bitcoins. It is a convenient way to engage in Bitcoin trading without having to seek out individuals in the real world or the cyber world. Transaction fees tend to be low. For example, Coinbase, established in January 2015 as the first licensed Bitcoin exchange in the United States, charges a fee of just 0.25 percent of a transaction. Interestingly, Wall Street invested $106 million in the exchange, in spite of or perhaps even because of the potential threat to the Wall Street system this digital currency and its associated technologies poses.
Other Ways To Invest
As with any other investing sector, there are always financial experts and skilled investors looking for ways to reduce Bitcoin investment risk. While periods of volatile prices can yield remarkable gains, they can, for those on the wrong side of those changes, result in significant losses. So, naturally, investors have been motivated to find other ways to invest in Bitcoin, ways that didn’t leave them quite as exposed to potential losses as some have felt when simply buying and selling Bitcoins.
One very recent alternative method of Bitcoin investing has just hit the Nordic NASDAQ, the Bitcoin based Exchange Traded Note (ETN), denominated in the Euro. A few months prior to this Euro Bitcoin ETN, the very first Bitcoin ETN, in US dollars appeared on the Nordic NASDAQ. These financial instruments are crafted from unsecured debt. Investors buy the debt and gain a return as it is paid. Since these are Bitcoin ETNs, investors can benefit in terms of return on their investment when the value of the Bitcoin increases without actually having to directly buy Bitcoins.
These investment vehicles, however, are based on debt, so there is risk involved and careful assessment of this type of investment instrument is required. For those investors who don’t feel comfortable counting on debt repayment for their ROI, there are other options, such as Exchange Traded Funds (ETFs) based on Bitcoin. With this type of investment opportunity, a fund purchases, mines or, in the case of the Bitcoin Investment Trust, wins them at an auction and investors buy shares, earning returns as the value rises.
Debate, Of Course, Rages On
Experts debate the risk involved in investing in Bitcoin. Some investment professionals point to the wide price fluctuations the Bitcoin has experienced and say it is far too risky of an investment. Others point to the solid production limit of 21 million Bitcoins, saying that even though there are price fluctuations right now, in the end, because of the limited supply, prices will rise and stay high enough that a worthwhile return can be expected. Some even point to the American dollar and fiat currency in general and say that it is riskier than Bitcoin because governments print more and more of it, steadily degrading its value.
There are financial experts debating whether or not investing in Bitcoin is really even investing at all. Those that say it is merely speculation, not investing say that it has no real, intrinsic value, nor can it produce additional value, citing the example of a company that one would buy stocks in. They warn that investment vehicles based on the Bitcoin are little more than derivatives based basically nothing but a shared decision to ascribe value to something that doesn’t even exist in any physical form. Others insist that Bitcoin is as legitimate an investment as commodities and futures are.
There is more at play for some investors. For these investors, it’s not just about profit and loss. It is also about ideals, about truth and the leveling of the playing field. It’s about the financial industry gatekeepers not being able to keep the riff-raff – the average person – away from the investment opportunities that have helped keep the rich getting richer while for the average person real wages have gone down over the past few decades. Decentralized digital currencies along with banking and investment opportunities that fall outside of the regulatory control of industry gatekeepers will chip away at the revenue and, more importantly, the power of the traditional financial industries. For these investors, that is something worth investing in.
The Bottom Line
This is an investment decision you’ve got to make for yourself, whether you are the purely practical, dollars and sense sort of investor or an idealist investing in business and concepts you truly believe in. Financial experts and investment professionals are great sources of information and guidance, but the final determination of whether or not to invest in Bitcoin or how much to invest for how long, those are questions you’ll have to answer according to your risk tolerance, how close to retirement you are and your own overall life view, your own sense of priorities. Invest your time in learning all you can before making any investment, large or small, short-term or long.
Attention ALL Capitalist Subscribers: Elon Musk, Mark Cuban, and Richard Branson reveal how $25 gets you into one technology set to grow 2,000X BIGGER than Bitcoin.