Everybody is talking about Bitcoin. It seemed to start out as a strange internet currency only traded by people deep in the web, hackers, criminals and computer geniuses. Now, average people are starting to invest their money there, hoping they’re going to make it rich.
But it’s also really difficult to get ahold of what exactly Bitcoin is, which is why we talked to Clem Chambers, author of Trading Cryptocurrencies: A Beginner’s Guide — Bitcoin, Ethereum, Litecoin, who broke it down for us in simple terms.
What is Bitcoin?
“It’s a coin issued by a computer system. It’s computer money,” said Chambers. “The same way that a dollar in a bank account is a record of an asset, which has no tangibility — you’ve got a thousand bucks in a bank account, somewhere a computer has registered that you have $1,000 in your account. A Bitcoin is rather like that.”
It’s also one of many types of cryptocurrencies that function this way. Litecoin, Ethereum and Zcash are a few other types. Cryptocurrency is not legal tender (meaning businesses aren’t required to accept it as they might be a dollar), but it is a currency people can choose whether or not they accept as payment. Expedia, Microsoft and Overstock are a few places that have started accepting Bitcoin, for example.
Banks work by paying computer scientists and tellers to keep a record of our money, Chambers says. The technology that creates Bitcoin allows computers to do all of this accounting work instead, called “mining.”
“It’s like a distributed bank, which is why banks are so scared of it all, because they could go away. Not because of Bitcoin, but because of this technology,” Chambers said. For a while, the average computer could participate, but now it takes a particularly strong one. “Every 10 minutes, there’s another 12 Bitcoins being made.”
But you don’t have to make Bitcoin in order to have it, and instead, you can go to sites like Coinbase and purchase it. Buying Bitcoin is rather similar to opening up a bank account, actually, and they’ll check you out and verify that you are who you say you are. Once you buy it, you can keep it in the “bank” of the site you’ve purchased it from or you can download it to a wallet on your phone or computer or you can print out proof of ownership.
This is one of the struggles with Bitcoin, Chambers said, “It’s quite difficult to secure.” The bank could get “robbed” (by hackers), you could lose the money by not backing up your computer or phone or by your physical proof being lost in a fire. It’s not entirely dissimilar from cash hidden under your bed (or in a Wild West bank) or gold bars in a safe.
We’re hearing so much about it because it’s an entirely new way of creating money, and people have started investing in it. It started out being worth about $7 a coin, and recently, it’s been as high as $17,900 a coin. “People have been buying Bitcoin because people have made money buying Bitcoin,” he said.
Should I invest in Bitcoin?
Maybe. It’s an incredibly risky investment, Chambers said, to the point that it’s more like a speculative investment if not closer to gambling. “That doesn’t mean it can’t make you a lot of money; it doesn’t mean it can’t lose you a lot of money,” he said. It’s just super-risky.
And there are a lot of reasons it’s risky. The government could ban or highly limit it, like they’ve done recently in China. Governments aren’t a big fan of people being able to move large amounts of money out of the country, which is what led to China’s crackdown. And there’s the risk, as mentioned, that the “bank” you’re keeping your Bitcoin in could get hacked or go bust or you could lose it because you fail to back up or your computer crashes or the printout is lost or destroyed, and there’s also just the volatility of the market. “It was at $20,000 only six weeks ago, and it hit $5,000 only yesterday, and it’s back up to, what, $8,000 today?” Chambers said. “If that isn’t risk, what is?”
So, essentially, don’t jump in just because everyone else is doing it. This isn’t a place to get FOMO, he said, and there’s always a party going on somewhere.
If you’re truly interested in cryptocurrency, your best bet, he said, is to buy books and read online about how it works until you get a solid understanding of it. And then, he recommends, buy $50 worth of Bitcoin. “Open up other accounts with little other cryptocurrencies and play with it for a couple of weeks where you’ve made $100 or you’ve lost it all,” he said. “That will give you a feeling of what it is you’re doing, what’s going on.”
Working with small amounts and getting a real understanding of how they work is possible with cryptocurrency because it can be traded at such small amounts. “You’d need, say, $20,000 to do that in equities,” he said. You can do it with about $3 of Bitcoin.”
Also, Chambers believes this isn’t a trend, but rather will be a phenomenon for at least a generation. “That big spark before Christmas is gone,” he said. “It’s still the Wild West; it’s still a gold rush. You want to plan and then you can get it right.”