CryptoMania!
We keep hearing about Bitcoin and other cryptocurrencies. And it seems like the number of these stories has been increasing over time. The thing is, news stories and stories in financial publications never really explain what these currencies are, how they are created, how they work or how their value is determined.
So, I thought I’d try to give you some simple explanations for these currencies. Here’s hoping I succeed!
Since, believe it or not, there are between 5,000 and 7,000 cryptocurrencies in existence, I’m going to use “Bitcoin” to represent all of them. Besides, I’m tired of typing “cryptocurrencies.”
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Bitcoin is a digital currency and, in reality, that means that Bitcoin is nothing. That’s right, nothing. There is no “coin” that represents a Bitcoin. You can’t go to your bank and withdraw some Bitcoin to go shopping. Most business don’t accept Bitcoin as payment.
With investments like stocks, you own a share of a business and its profits. With bonds, a company or a government has taken your money with the agreement that they will repay you with interest.
Bitcoin, on the other hand, is the Kardashian of investments: it’s valuable just for being valuable. No one is promising that your Bitcoin will be worth anything. There’s no guarantee that you will be able to spend your bitcoin. Unlike other currencies, Bitcoin is not tangible. You won’t find a few Bitcoins on the floor under the cash register at Wawa.
While US coin and currency doesn’t have any intrinsic value (like the old gold and silver coins did 100 years ago), at least the US government stands behind its currency and it’s that guarantee that gives our currency value. Not so with Bitcoin. The people who own Bitcoin or those who want to own Bitcoin give it value based on what they will pay to acquire a Bitcoin.
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Who invented Bitcoin? It was invented by Satoshi Nakamoto in 2008. His goal was to create a common currency that could be used around the world to facilitate online payments.
As Bitcoin gained popularity, people realized that Bitcoin offered a way to anonymously hold value, meaning that the government couldn’t track your spending. That’s helpful if you guard your privacy. Especially if you’re a crook.
In addition, people began looking at Bitcoin as an investment. It’s the investment aspect of Bitcoin that has made it so popular.
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Where does Bitcoin come from? Bitcoin is “mined.” Not in the dig in the dirt type of mining but in the computing sense. Extremely powerful computers are used to play a form of game which can create new Bitcoins. Don’t try this at home! The computers used are NASA powerful. Often many computers are strung together in a “farm” where the amount of energy consumed can be immense.
In fact, if Bitcoin was a country, it would use more electricity than Argentina!
The mining process has been described as the computers playing a game. A very complicated game, but a game nonetheless. I’ve done a lot of research to get a simple description of this “game” but I’ve not found one.
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Is Bitcoin secure? Well, Bitcoin uses “Blockchain” technology to keep it safe. (To explain Blockchain would require a whole other article.) Bitcoin is password protected by a digital encryption key. Lose the key and you lose your Bitcoin. Simple as that, just as this poor guy who lost $220 million in Bitcoin found out.
So maybe you don’t want to write that encryption key on the Post-em Note on your computer monitor.
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Is Bitcoin a good investment? Well, that’s up to you. It doesn’t represent anything like stocks or bonds do. Bitcoin doesn’t pay interest or dividends. It merely goes up and down in value. BTW, you could do the same thing by buying Swiss Francs or Japanese Yen. The question is why would you?
Some people attribute Bitcoin to the “greater fool theory of investing” where one buys an investment (the fool) and hopes that someone will buy the investment from him at a higher price (the greater fool).
At the end of this article there are a couple of charts1 that may help you. These compare the value of Bitcoin and the S&P 500. Take a look and tell me which one outperformed the other.
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Ok, so after reading up on Bitcoin, you just can’t help yourself. You need Bitcoin. How do you buy some? Like securities, you need to open an account with a broker. Except with Bitcoin it’s called an “exchange.” One exchange is Coinbase (this is not a recommendation). Unlike most zero commission stock brokerages today, you’ll pay fees to buy and sell your Bitcoin.
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I hope this has been a good overview of Bitcoin. It’s something that you can’t hold in your hand, something created through a mysterious process and something that in and of itself has no value.
Personally, I like to see a share of Exxon or IBM stock in my brokerage account. I like to hold a $5 gold piece in my hand. I’m not too keen on this digital stuff.
Over the years I’ve heard some investors say “this time it’s different.” I heard it right before the dot com bubble burst in 2000 and heard it right before the mortgage meltdown in 2008. I’m hearing it now about Bitcoin.
As I quoted in my blog a few weeks ago: “History never repeats itself but it rhymes.”
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“Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety.” – Benjamin Franklin
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Normalcy in the Rubble
Their school in Kharkiv, Ukraine was a bombed-out shell, but these kids had their prom anyway with troops looking on. Way to go!!!
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Bitcoin vs. S&P 500