Is Investing in Bitcoin Safe?

The short answer is ‘no, not really.’

Bitcoin is a hot topic these days in the financial world. It was invented in 2009 when it was released as open-source software. This allowed users to mine bitcoin and use it as currency.

Since then bitcoin has skyrocketed and also plummeted in value. This has generated a lot of excitement and concerns for investors. Many analysts and institutions say bitcoin is unstable and risky to invest in.

Warren Buffett once told reporters, “It’s a gambling device… there’s been a lot of frauds connected with it. There’s been disappearances, so there’s a lot lost on it. Bitcoin hasn’t produced anything.”

Ouch.

Let’s walk through the basics of bitcoin. Then we’ll look at the risks of investing in bitcoin.

What is bitcoin?

Bitcoin is one of several cryptocurrencies. In other words, it’s a currency just like the Euro or the Peso. But it’s a digital currency. In order to send or receive bitcoin, you need a virtual wallet. Your virtual wallet holds your bitcoin.
Blockchain

Blockchain is a public ledger which records all transactions with bitcoin. To use bitcoin, you must create a permanent address. Whenever you send or receive bitcoin, it’ll be publicly recorded. This means using bitcoin is not private.
Units

The basic unit is a bitcoin, which is represented by the symbol (₿) and abbreviated BTC. There is a millibitcoin, abbreviated mBTC. These are worth 1/1000th of a bitcoin. The smallest unit is called a Satoshi, which is one hundred millionth of a bitcoin.

Units are registered to a bitcoin address. Once they are transferred, the units become registered to another’s address.

How do you make money from investing in bitcoin?

Trading bitcoin

The most common way individuals try to make money is by simply buying and selling bitcoin.

Some try to do this with tangible currencies. Let’s say you trade U.S. dollars for Euros because you believe Euros will increase in value. Later on, you trade the Euros back for more U.S. dollars.

There’s a similar strategy with bitcoin. Investors buy bitcoins hoping they’ll increase in value in the future, then sell them to make a profit.

Some investors are buying and holding bitcoins, believing they will appreciate in value in the distant future.

Mining bitcoin

This complicated process requires specialized equipment, specialized software, and tons of electricity.

Miners record all the transfers of bitcoin. Then they clump this data together in a ‘block’ and send the information to blockchain (Remember that’s our public record of all bitcoin transactions). In return, blockchain rewards the miners with new bitcoins.

This activity is only profitable when done on a large scale. The main players are warehouses where electricity is cheap. They’re full of expensive mining hardware.

There are sites that offer you the option of mining through the web. Supposedly, you’re using their equipment to mine and receive some of the profits. However, these sites are widely considered to be scams.

What are the risks of bitcoin investments?

Almost every investor and advisor will tell you that bitcoin is extremely volatile. It’s susceptible to sudden change at any moment. Here’s the history of bitcoin’s worth in U.S. dollars:

You can try trading, but keep in mind this is a highly risky investment.

In addition, there are a lot of scams in the bitcoin world. Many investors have reported losses of money to Ponzi schemes.

These schemes promise high, fast returns. But what they’re doing is using the money received from new investors to pay previous investors. The high-interest rate entices a lot of investors, but the model is unsustainable. Eventually, the schemer disappears with whatever money’s left.

Bitcoin is not heavily regulated or policed, making it easy for schemers to operate.

The future of bitcoin

Bitcoin is still in its early stages. It has the potential to grow into a new world currency in the future. But for the time being, it’s volatile and unpoliced.

Bitcoin is a brilliant invention, but it’s wise to wait to see how the currency develops. For now, there are better ways to invest your money.