Investing in Bitcoin
by Mary Callahan
Bitcoin have exploded into the new year with an impressive surge in value. Finishing up 2016 at a record high vs the pound and euro, the pioneer cryptocurrency has continued to climb through the month of January (you can buy bitcoin for 1071$ according to CEX.io February 20 data) . Whilst it’s unclear what exactly has driven this price increase, market analysts have forwarded various theories. They highlight the currency’s increased market acceptance, the election of President Trump to office, and a growing distrust of the Chinese Yuan, among other factors are highlighted as crucial.
Whatever the reasoning, the record breaking highs and four-figure value of Bitcoin attracts new investors daily. Many are drawn by stories of early miners making a killing being among the first to harbor a cache of BTC, or savvy investors taking educated guesses on an unknown currency in its formulate years. One thing all bitcoin investors have in common however is a desire for the current trends to continue.
I’m sure many of you already have a few BTC set aside for that metaphorical “rainy day” but for those of you who haven’t, fear not. We’ve prepared this guide to help you understand what you’re getting into by investing in Bitcoin.
Why invest in Bitcoin?
In the age of information that we live in, there’s an unprecedented level of distrust in central authority figures, extending into international finance. In the wake of the global recession of 2008-13, there is growing public and private resentment towards banking institutions. This is encouraging people to wake up to the idea of using different mediums of exchange.
Owing to the finite number of Bitcoins that are able to be mined, problems of inflation inherent in traditional currencies do not affect BTC. Theoretically speaking, in a completely free market, the price of each coin would increase infinitely, with every BTC being worth hundreds of millions of dollars each. Granted, this does involve a huge acceptance of the currency on a global scale and several other (somewhat far-fetched) factors falling into place but on paper, as trade continues to increase, so too should the value of each coin.
How to invest in Bitcoin
Buy and hold
The easiest way to get into Bitcoin investment is to simply buy some coins and wait. This method has already made many people incredibly wealthy. Those who bought or mined Bitcoin early on have been rewarded with substantial increases on their investments. With units being originally sold for a few cents each and now being worth over $1,000, this is obviously an attractive option.
Investment in mining
A little reading around Bitcoin and you’ll discover that the currency is ‘mined’ using sophisticated computers. This of course prompts the question from those already possessing advanced systems: ‘Why can’t I do that too?’ Well the short answer is that they can. However, whether it is a good idea to immediately sell all your worldly possessions and invest in mining gear is another issue entirely.
Owing to the increasing value of Bitcoin, the prospect of individual mining has become less viable economically. Huge conglomerates have developed high-tech, purpose-built machinery that work in tandem on enormous ‘farms’. Owing to an economy of scale, these teams can reduce costs to the bare minimum, making them incredibly efficient. Unfortunately, the hobby miner just can’t compete. The price tags on the machinery alone makes mining unprofitable these days, especially when combined with the cost of the electricity required to run a mining rig for the hours needed.
Investment in companies
A more traditional way to make an investment in Bitcoin would be to invest in one of the many BTC start ups that are emerging. Of course, being completely new, a whole infrastructure needs to be devised and implemented to help cope with the increasing market acceptance and demand for the currency.
Bitcoin exchanges, ATMs, and point of service payment systems are all shoot off industries which a seek greater financial backing. Buying stocks and shares in these would be a savvy move for those hoping to get involved but are apprehensive about the simple purchase of large amounts of the currency itself.
Only invest what you can afford to lose
As with any investment you shouldn’t use money that you can’t afford to lose. This holds true with Bitcoin more than most traditional forms of investment. Although the economic model which BTC follows is one akin to gold (finite and deflationary), there are several factors that could completely sabotage any expected growth of the currency.
Lack of confidence
A widespread, sudden lack of confidence in the currency could be disastrous for its value. If the daily number of people making trades on the network suddenly plummets for whatever reason, so too would the price per unit. Such a shift in attitudes could be caused by a combination of different factors. For example, several of the large exchange’s security being compromised, or what’s known as a “majority attack” on the network could cause the level of scepticism required for a sharp plummet in value.
Being such a new innovation, BTC is largely unregulated. However, with such an unheard of growth in value, the chances of it staying this way are slim-to-none. It’s no secret that governments want their central banks to prosper, and deem any threats to this prosperity as dangerous. Naturally, Bitcoin could come into the firing line from oppressive legislation, as it already has done in some jurisdictions.
It’s important to be aware of the risks, pros and cons associated with different BTC storage methods. Exchanges represent the most convenient option but have been the target for sophisticated hackers in the past. Likewise online bitcoin storage wallets offer less incentive to hack (because personal users’ wallets will be considerably less valuable than an entire exchange) but are still somewhat at risk from malicious attack. Finally, you can store your investment on an offline storage medium. This will be the most secure option but will also be the least convenient. If you plan on spending BTC or buying additional currency, this option will be much less viable.