Bitcoin may have officially been launched in 2008 but it’s only over the last few years that it’s become a house-name name.
An increasing number of established online companies are readily accepting it as payment for products alongside established methods like Visa and Mastercard.
Presidential candidate Rand Paul recently hit the headlines for being the first campaigner to accept donations in Bitcoin.
The US even offers a number of “Bitcoin ATMs” where users can pay cash into their Bitcoin account or cash out on funds.
So has Bitcoin finally become mainstream? Or is it another flash-in-the-pan? Most importantly of all, does investing in Bitcoin make sense right now?
What is Bitcoin?
Bitcoin is a so-called “crypto-currency” that exists only on the Internet. Unlike many “real world” currencies it has no backing of precious metals and there are no moderating systems to control the value of Bitcoins.
In essence, Bitcoin represents one of the largest peer-to-peer networks in the world and has become famous for its de-centralized system for management and maintenance. As a disruptive technology, which does not rely on banks for its existence, it’s certainly causing concern among some financial institutions and politicians.
Bitcoin essentially allows near-instant transmission of money on a global scale, to and from anyone else with a Bitcoin account (or “wallet”). Alongside this the transactions can be completely anonymous, drawing criticism that it could be used for money-laundering.
Invest in Bitcoins, Buy an Apartment
4 years ago a Norwegian investor decided to try buying some Bitcoins as an experiment. All told be spent $27 buying 5,000 Bitcoins. Then he forgot all about his investment.
It was only recently, with Bitcoin gaining front-page news on a regular basis, that he remembered his own initial investment. After some hard work trying to remember his password he finally managed to regain access to his original investment.
What he found stunned him; his paltry $27 investment has turned into an incredible $886,000. That’s just passive growth with no active trading in any way. Unsurprisingly he withdraw a percentage of his funds and used them to buy a swanky apartment outright.
Not bad for an investment that originally cost less than a dinner for two in an average restaurant.
Volatility Rules the Day
Our Norwegian friend may be one of the most famous cases of investors making considerable money through Bitcoin but this market is not without its risks.
Finance professionals disagree over whether or not Bitcoin is actually a giant Ponzi scheme, doomed to eventual failure.
If this weren’t a worrying hint of how things could turn out, the Colorado Securities Commissioner (CSC) Gerald Rome has warned investors that Bitcoin prices “fluctuate wildly”.
With no financial protection whatsoever for investors in Bitcoin, it’s fair to say that this is not a low-risk investment strategy.
Indeed, according to the Wall Street Journal Bitcoin prices have historically been 26 times more volatile than the S&P 500.
It’s also important to take into account that other attempts at digital currencies have failed spectacularly. Just a few years ago the alternative finance websites were alive of talk about eGold, just before it took a nosedive into the abyss.
In other words: buyer beware.
Opinions Are Divided
Not everyone seems to be worried by the potential risks. In recent years, despite some precipitous swings in either direction, the value of Bitcoin has shown an overall upward trend. In 2012, for example, the value of Bitcoins increased by 300% according to Investopedia; a healthy return for investors confident enough to ride the storm.
Institutional investors are starting to take note of such heady returns. 2015 is notable as the first year in which investment in Bitcoin by professional investors finally crossed the $1billion per year mark, with many VCs bullish about the future of the currency.
How to Invest in Bitcoin
After weighing up the pros and cons, should you decide that Bitcoin investing might just be for you there are a number of ways you could choose to get involved.
The most common – and easiest – way is simply to buy some Bitcoins. Many websites offer such services and charge only small transaction fees to turn your pounds or dollars into Bitcoins. You then have two choices; buy-and-hold, hoping that the long-term growth observed gradually increases the value of your funds, or adopt a “day trader” mentality to capitalize on the high levels of volatility in the market.
The second option for investing in Bitcoin is to consider the process known as “Bitcoin mining”. In essence, the system which runs the Bitcoin network exists across millions of internet-connected computers. The whole network shares the job of managing and maintaining the infrastructure. Anyone who devotes computer space to the system is able to “earn” Bitcoins as payment for services rendered.
This sounds like an easy and low-risk way of investing in Bitcoins until you read the fine print. The complex algorithm which runs the network is designed to get ever more complex over time. This means that processing the transactions uses ever more computing power and electricity.
While some investors still swear by Bitcoin mining, the mathematics of the situation suggest that the ROI of such tactics are dropping all the time and, unless the value of Bitcoins continues to rise sharply it may simply not be a financially viable strategy in the future.
One final way to invest in Bitcoin is to put your money into one of the few professionally-run funds which buys up Bitcoins on investor’s behalf.