What is Bitcoin?
Odds are, if you’re not a tech geek or a Forbes reader, you haven’t heard of Bitcoin. So, I’m going to avoid the jargon and make it as simple as possible. So what is this thing that will probably make you rich?
So basically, Bitcoin is the world’s first major virtual currency or cryptocurrency. Bitcoin could be even better than investing in Google, Apple or Amazon in the early days. Remember the Winklevoss brothers, Zuckerberg’s enemies in the Social Network? They have invested millions in Bitcoin and are even setting up the first Nasdaq Bitcoin fund. If you’re interested in the details of how it works, go to the bottom of the article.
How Can Bitcoin Make Me Rich?
In 2010, Bitcoin was literally worth pennies. In a famous case, one early Bitcoin miner (read bottom of article) bought exchanged two pizzas for 10 thousand BTC (bitcoins). As of May 10th 2014, BTC is trading at $455.13. In 2013, Bitcoin grew 4000%. So you might be wondering why people haven’t jumped on the bandwagon if it’s such a sweet deal. Good question. Truth is, it is a high risk investment. Half of the economic analysts hate it; the other half think it is the best thing since the invention of fire. Only time will tell who’s right. Here’s why you should invest in it regardless of who’s right.
Bitcoin has a limited supply of 21 million units (each one is divisible though). If Bitcoin goes mainsteam, it’s potential demand is as large as the amount of people who use paper money today. Remember one of the basic lessons in any economics class: Low supply plus high demand makes a good extremely valuable. That’s why the price has increased so much.
Let’s imagine you buy today. Silicon Vally venture capitalist Chris Dixon guesses Bitcoin could reach $100,000 in the future. Let’s be a little bit more conservative and estimate it at $20k. Here’s how what your investments would return.
$ 1 * 20 = $20
$100 * 20 = $2000
$2500 * 20 = $50000
To make a million dollars you’d “only” have to invest $50k. Absolute worst case scenario, you lose the number on the left. Absolute best case scenario, the numbers on the right side of the equation, well, let’s just say they were a conservative estimate.
- Since Bitcoin is a decentralized currency, it isn’t vulnerable to government produced inflation. In fact, people in Ukraine and Argentina are buying Bitcoin to avoid getting hurt by their currency crises.
- Bitcoin can be sent and spent internationally with no middleman or fees.
- The more people who get on board, the more efficient, valuable and useful it becomes.
- Bitcoin is democractic.
Then Why Isn’t Everybody Onboard?
Backing, taxes, volatility, bubble, safety, acceptance. Those six keywords are scaring some people away, for now. (thanks for the misinformation Krugman). I’ll address each of these concerns before explaining to you how to invest.
- Backing: “Bitcoin is merely a virtual game, it’s not really backed by any real good.” Well guess what; you’d have a pretty hard time if you try to find the correspondence between those numbers in financial discussions and what backs it up in the real world. The economy is becoming increasingly virtual. Just look at PayPal, credit cards, online services. Bitcoin is merely reflecting this historical financial paradigm shift.
- Taxes: the IRS considers Bitcoin to be a good, not a currency, so you’ll get taxed on any profits. A, Bitcoin’s status will change if it becomes popular enough. B, so what? Paying taxes on returns is normal, even if you’re only making 5%. If you’re multiplying your investment, taxes won’t be a big deal.
- Volatility: Yes, BTC prices have greatly fluctuated up and down over these four years, nevertheless, the trend has still been one of exponential growth. In other words, when the price goes up, it goes up higher than it fell. Additionally, Bitcoin will stabilize and grow, albeit at a slower rhythm, just like Microsoft or Facebook. In fact, Bitcoin is designed to avoid volatility and to be deflationary. Also, current volatility is driven by low liquidity due to the relatively small amount of Bitcoin traders. As of today, Bitcoin has undergone a downward trend, which means that if you buy today and can hold on to a small loss for a short period of time, you’ll still make it in time before the upcoming increase.
- Bubble: Bitcoin has been compared to Netherland’s historic Tulip Mania Bubble. The efficient market hypothesis and reviews of the biased information sources indicate that this speculative bubble story has been blown way out of proportion. Even if the story was accurate, they are different cases. People were willing to invest in tulips at ridiculously high prices which in no way reflected their real value. Bitcoin, on the other hand, has a great utility; perhaps, it’s value is even currently underestimated.
- Safety: Bitcoin became a major center of attention when the FBI seized the massive “Silk Road” black market website. Many buyers and sellers used Bitcoin because it is hard to trace. What this really means is that the drug dealers on the Silk Road really knew how to capitalize on the general benefits of Bitcoin, not that buying Bitcoin is somehow getting involved in dirty money. There are also reports of Bitcoins being stolen from hacked computers. There’s an easy solution to this: print it out.
- Acceptance: While most business don’t take Bitcoin as payment yet, this site lists 185 pages of business which do. And that’s only in four years of existence. Once Ebay, Amazon or any other major site start dealing in Bitcoins, the rest will inevitably follow.
How to Get Started
My favorite site for Bitcoin trading is Coinbase.com. All you have to do is signup, verify you’re the actual owner of the bank account you’re going to pay with and then start buying. You can also add a cell-phone authentification system to make sure only you can access your account with a special code. Additional benefits include the fact that they store Bitcoins in offline encrypted wallets and provide up-to-date exchange prices as well as graphs for any given period of time. If venture capitalists have trusted these elite Ivy League staff with millions of dollars, then we can too.
For additional safety, remember to print out your Bitcoins.
How Bitcoin Works