Anybody with a Facebook or Twitter account has probably seen the conversations and news links scattered along their newsfeeds over the last month. Bitcoin is on the rise. The value of a Bitcoin has risen from $766 this time last year to about $17,000 currently. The surge has caused an enormous amount of attention, as those who hadn’t even heard of Bitcoin until now are making plans to buy in. Hyperbole concerning how much money a person would have made if they purchased Bitcoin a year ago, or five years ago, is fueling speculators and neophytes looking for the next gravy train. Coupled with the innate financial pressures that the holiday season tends to bring, and Bitcoin has begun to look like a safe and solid “get rich quick” scheme. One thing though, before you dump your savings account into Bitcoin, maybe you should know what Bitcoin is first.
Bitcoin is a cryptocurrency, which is defined as a digital currency designed to work as a medium of exchange that uses cryptography to secure transactions, control the creation of units and to verify assets. It is a peer-to-peer electronic cash system. Cryptocurrency is alternative currency, not at all affiliated with the traditional currency which is printed and controlled by the Federal Reserve. There are currently over 1,300 cryptocurrencies available for purchase and sale. Bitcoin was the first, created and introduced to the world in 2009 by Satoshi Nakamoto. Nakamoto is an unknown, the name could represent one person, or it could represent the group of people that designed and implemented Bitcoin. No one knows the truth about Nakamoto. What is known is that those who designed Bitcoin also designed the entire scope of structure to buy, sell, trade and use Bitcoin as a currency.
The attention given to its meteoric rise in value over the last year has made the idea of cryptocurrency a necessary conversation for those in the financial sector and an aspirational conversation for those who seek to escape the rat race. Will cryptocurrency last? How does it work? Can it be trusted? Buying Bitcoin is different than trading stocks. Buying a share of a company (commonly referred to as stocks) is normally a strategy that investors use in order to attain some sort of capital appreciation, meaning that as the company you’ve purchased stock in grows and expands, your stock in the company will appreciate in value, and when you sell it the value of your stock would be worth more than when you purchased it. Although the strategy in buying into Bitcoin is similar, the difference is that Bitcoin isn’t a corporation. Bitcoin doesn’t manufacture products or services. Bitcoin, its value and worth, is simply an agreement between buyers, sellers and corporations that accept Bitcoin as payment for services.
As more people buy in to the concept, the price of a Bitcoin has soared, reaching heights that would make the early buyers quite wealthy. As with any financial product that is traded, potential investors should apply due diligence before jumping in headfirst. Bitcoin has gone through numerous cycles of bubbles and bursts. In 2011, the price of a Bitcoin rose from 30 cents to $32, before falling back down to $2. In 2013, the price of a Bitcoin rose to $266, before falling back to around $50. Financial analysts have stated that the volatility of Bitcoin is roughly 18 times that of the American Dollar, all the more reason for new investors to apply strategy and common sense to their potential investments.
So, while the news of an alternative currency that is making people rich may seem like a heaven-sent opportunity, before you listen to your Facebook friends and begin to spend your dollar and a dream, do your homework. There are many financial products that you can invest in for financial growth. Don’t be lulled into this new one because of its shine and attention.