They’ve been around since 2009, but Bitcoins have just recently started making headlines around the world. The world’s first decentralized digital currency, created by Satoshi Nakamoto, has had a roller coaster of a ride – to say the least. Whether it’s trying to comprehend how people produce the currency or understanding its market fluctuations, people are – simply put – mystified by this currency that has no central monetary authority.
With that said, here are seven considerations to take into account if you’re feeling adventurous enough to try your hand at investing in Bitcoin. Four years ago, the risk would’ve been worth it. Today, who knows.
How Bitcoins Work
Before you start throwing money at a risky investment, you should first know what you’re getting into. Once you’ve installed a Bitcoin wallet on your computer or mobile device, you’ll receive your first Bitcoin address (you can create more later). You use these addresses so that you can deposit or receive payments (you should only use them once).
Next, you’ll want to familiarize yourself with the block chain, which is a shared public ledger that the entire Bitcoin network relies on. All confirmed and verified transactions are included in the block chain, with the chronological order of it being enforced with cryptography. The transactions performed that are included on the block chain (from one Bitcoin wallet to another) hold a secret piece of a data called a private key that’s used to sign transactions and provide proof that the Bitcoins have come from the owner of the wallet.
Finally, a distributed consensus system — mining — is used to confirm waiting transactions by including them in the block chain. This system enforces the chronological order in the block chain, protects network’s neutrality, and allows various computers to agree on the system’s state. Additionally, mining prevents any person from adding new blocks consecutively on the block chain, keeping individuals from controlling what’s in it.
For a comprehensive article on how Bitcoins work, check out this white paper written by Nakamoto.
How Investment Works
If you want to invest in Bitcoins — or fractions of them known as satoshis — you buy and sell them on numerous exchanges around the world for traditional currency. You can also transfer them directly over the Internet to another user using the right software. They’ve become so popular that Bitcoins are used to gamble or even purchase web hosting, among other things.
Considering you don’t have to deal with bank charges or exchange rates, though, this form of investment has become attractive in recent months. If you take into account the recent climb its made in value by looking at the one-year history on this chart, it’s even more appealing because of its seemingly limitless ceiling. But what looks like a great investment now can certainly change in a split second.
In short, the market’s volatility are both good and bad reasons to invest in this currency.
The Risks Involved
As with any volatile market, there are risks involved — and that’s an understatement when you’re discussing Bitcoins. Here are some things to consider before you unleash your wallet (or purse) and take a leap of faith.
- No regulation. Although it’s a source of happiness for Libertarians, it’s a concern people who want to invest in Bitcoins. Before Bitcoin can become a mainstream investment, experts agree that there must be some level of regulation in place.
- There’s nothing backing it up. Unfortunately, for investors, there’s nothing real or tangible backing up a Bitcoin’s value. For example, when it comes to gold, people can at least trade it for its intrinsic value — it’s pretty, shiny, and people love to own it. But Bitcoin doesn’t hold such value in reality.
- Not easy to buy. If you’ve learned how to buy them — yes, that’s difficult enough — you’re still not completely sure you’re dealing with a credible party. When you’re in a market that’s constantly warning you to be careful with your money, it’s not much of a reassurance once you enter the market.
With all that said, it’s all up to you whether to take the risk or not. Sure, there’s a chance to score big and come out wealthier if you can get out of the market in time. But you can just easily lose it all in an instant.