You may have first heard of bitcoin as an investment option. The media carries many stories of people getting rich by buying bitcoin.
What Is Bitcoin?
Bitcoin is a cryptocurrency.
A cryptocurrency is a digital currency secured by cryptography.
It isn’t a coin. It isn’t a note or a bar of metal. Bitcoin takes the form of a number and it resides in computers. You can send it to someone else just as easily as you send an email.
How do you buy Bitcoin?
You can do so on the following exchanges:
Why does it have value?
Bitcoin has value because people choose to give it value. That’s also true of art, precious metals and currency.
It can be worth a lot or a little, depending on the value people choose to give it.
What makes bitcoin different from currency?
The main concept to understand is that bitcoin is decentralized.
Bitcoin transactions don’t require a third party to validate a financial transaction. Any two people, anywhere in the world, can send bitcoin to each other without the involvement of a bank, government, or other financial institution.
It’s easier to send than money. It’s faster. The transaction fees are much less than those charged by banks. It’s a more efficient form of currency.
Many people like the idea of having control of their own money, rather than letting banks control it.
How can Bitcoin eliminate third party verification?
Every transaction involving bitcoin is tracked on the blockchain.
A blockchain is simply a ledger. Unlike a ledger that can be changed, the blockchain writes new “blocks” each time transactions are created, adds them to the previous block and thus creates an immutable chain. The blockchain is a historical record of every transaction ever made using bitcoin.
You can see the first ever bitcoin transaction here.
Why is bitcoin attractive as an investment?
After the 2008 financial crash, many people lost faith in banks.
After governments reacted by printing more and more money, many people lost faith in currency as a store of wealth. Interest rates have remained low.
Not great for savers.
One attraction for investors is there will only ever be 21 million bitcoin. Supply is finite. Meanwhile, governments print ever increasing amounts of dollars, thus inflating the money supply and devaluing your savings and reducing your spending power in the process.
Just as investors are interested in investing in gold mainly due to the scarcity of finite supply, they are also interested in the scarcity of finite supply of bitcoin. As more people become interested, more people buy, thus driving up the price.
It is a store of wealth that governments cannot inflate away. And no government was involved in the creation of Bitcoin. Bitcoin was created by Satoshi Nakamoto. His identity remains a mystery. In 2008, Nakamoto wrote a white paper outlining how digital money, called Bitcoin, would work.
Then he promptly disappeared and hasn’t been heard from since.
People picked up and ran with the bitcoin concept, developing an ecosystem that might one day rival traditional banks, the finance industry and the execution of contracts.
Or it might be a fad, as many pundits like to claim.
At this point, bitcoin is a highly speculative investment class. Investors should consult an investment advisor before making investments decision and risk no more than they can afford to lose.