Recently there’s been a ton of buzz and user talk focused on Bitcoin and other cryptocurrencies. Investing in Bitcoin isn’t necessarily a bad decision, but it can certainly be categorised as a risky one, so we’re going to do a quick dive into the basic 101’s of both Bitcoin and cryptocurrencies generally as well the pros and cons of investing in it so you can make an informed decision about bitcoin.
I made a quick video to supplement your understanding.
Bitcoin itself is simply the world’s first cryptocurrency – there are thousands of other coins, each with their own unique purpose.
So, “what is a cryptocurrency?” you ask. Well, it’s essentially a currency based off a decentralised network of computers all continuously solving complex mathematics. Think of it this way.
If there were 10 individuals in a market. And person 1 sends some money to person 4 – the best way to validate that the transaction is legitimate is if the other 8 individuals (persons 2, 3, 5, 6 and so on) all confirms that this transaction. Cryptocurrencies do this through mathematics and computer encryption. This distributed “confirmation” of transactions means that you don’t need a centralised body such as a bank or government to authorise the entire system.
The big idea (or the trillion dollar idea) is that the maths can make everyday transactions, regardless of size simple and risk-free without the red-tape and cost of central control.
Watch this video if you want to learn more.
As mentioned, bitcoin’s decentralised network means it can’t be controlled by one central authority. This means that, in theory, one central authority can’t tinker with monetary policy and cause a meltdown. This makes Bitcoin a resilient currency that will keep flowing even if the network goes offline.
Bitcoin is also easy to set up, with users able to setup a bitcoin in address in seconds, and nominally anonymous- users can hold multiple bitcoin addresses with none of them linked to names or other personal identification information.
On the other hand though, Bitcoin maintains complete transparency by recording the details of every transaction on the network on a huge general ledger- this is called the blockchain.
Anybody can view the bitcoins stored at a public address, but they won’t know who owns the address itself. Whilst there are measures that people can take to make their activities opaquer on the network, nothing will change the core factors of personal anonymity and public transparency.
Lastly, it’s important to remember that Bitcoin transactions are both fast (the network processing the payment in minutes) and non-repudiable. Once you send those bitcoins, there’s not getting them back unless the recipient returns them. No take-backs!
Investing in Bitcoin
The big thing about the technology behind bitcoin is that it could turn out to be truly revolutionary. Or, as some others believe, it could quickly become superseded by a competing technology and made redundant. So it’s easy to argue it’s either ultimately worth a lot or worth nothing at all. The truth is likely somewhere in between.
It’s this very speculation that has created the current bubble that’s allowing people to make money and if you want to invest it’s important to keep that in mind, because this atmosphere and uncertain quality creates what we would consider being a risky investment.
Risky investments are not necessarily bad. When they are management, they can be used effectively to create wealth. However, the nerves of steel required means that some simple rules of thumb can go a long way – a classic one is to keep these investments to less than 10% of your investment portfolio.
In my personal investment journey, I’ve learnt three basic rules of thumb when it comes to investing in risky assets:
- Invest only what you can afford to lose. Don’t do it with money you need to live on.
- Do your research, understand the who and why behind the coin you’re investing in.
- Surround yourself with a strong support group to share research and support each other when times get tough.
So, once you’ve set your mind right for risky investments and is now looking seriously at Bitcoin, starting out is simple. You’ll need a wallet to store your coins safely since generally it’s safer then storing your coins on an exchange. The biggest security hacks where people have lost money in the history of bitcoin has affected exchanges. Afterwards, sign up to your exchange of choice (and there are plenty of Australian ones), buy some coins and transfer it to your wallet.
A good place to start when looking for how to get a wallet or choose an exchange is the excellent plutos0x.com, they have a bunch of helpful information when it comes to getting into cryptocurrencies.
This all may sound a little daunting at first, but don’t worry! Although the learning curve is steep, using Youtube, Google and plenty of research will help you ensure you’re doing the right thing every step of the way.
Regardless of whether you choose to dip your toes into the tempestuous waters of Bitcoin, I/the Pocketbook team wishes you good luck and happy investing in 2018!