What is Bitcoin? And Should Anyone Be Buying it?

By Carol Church

Has anyone you know been talking about bitcoin lately? If your life is like mine, perhaps someone you know can’t STOP talking about it! It’s enough to make a financially minded person either very curious or very skeptical.

A golden Bitcoin
MichaelWuensch/Pixabay.com, CC0

What is Bitcoin?

Bitcoin is a currency system that is 100% “virtual” or computer-based. It is decentralized, meaning that no one bank or government controls it, and it is also anonymous and completely global. Transfers are made via computer through a very complex system, and do involve transaction fees. Some businesses (not many) accept bitcoin as payment.

Recently, bitcoin prices have been rising astronomically, creating a lot of buzz and excitement around this currency. You or those you work with may have heard that “if only” they had invested just a small amount in bitcoin some years back, they would be very wealthy now. So, what’s the catch?

Why is Bitcoin Risky?

Bitcoin is a risky investment in part due to the risk that it can be hacked. Hacking is obviously a significant issue whenever we talk about a computer-based currency. Though innovators are working hard to come up with solutions to keep the “keys” that secure bitcoin more safe and to make it more and more difficult to hack the system, the problem is far from solved.

It’s also true that if you lose the “keys” that unlock your bitcoin, you have a problem. Again, technology is working to solve this problem. For instance, it’s possible to buy hardware-based “wallets” whose information can be recovered even if they are physically lost.

Scammers also have taken advantage of the allure and mystique of virtual currencies and have managed to cheat people into purchasing completely fake cryptocurrency.

Another reason bitcoin is risky is that the government still hasn’t really figured out how to regulate it. Bitcoin’s anonymous nature has meant that it has been a favored currency of some unsavory characters, which has caused some general concern. The concept of bitcoin is also still so new that the government is unsure what it really “is” and how to handle it. It is possible that new laws could drastically regulate bitcoin in unfavorable ways or even shut the bitcoin market down, which would be a major problem for anyone holding it.

Bitcoin is also risky due to its historical price volatility. Over its short existence, it has been 5 times more volatile than the S&P 500. Historically, prices for bitcoin have tended to go up spectacularly and then crash. One-day drops have been as much as 80%. Keep this in mind when you see dizzying figures.

It’s important to understand that bitcoin and other virtual currencies are not backed by any bank or government. If you have a problem with bitcoin, you may not be able to get help from anybody; there may not be any customer support. In the past, some companies holding bitcoin have been unreliable, difficult to deal with, and have even lost customer funds.

 Who (if Anyone) Should Invest in Bitcoin?

Over and over again, experts make these same statements about investing in bitcoin or other cryptocurrencies:

  1. Only invest after you have paid off consumer debt, secured your retirement, and put away money for any children’s college funds—basically, only if you have “money to play with.”
  2. Be absolutely sure you know how to keep any investment safe. This requires a high degree of tech savvy.
  3. Only invest money you would be perfectly okay with losing.

This is a pretty high bar, and one most of us are not likely to be able to meet. However, it is fair to add that people have made money off of cryptocurrency, and many are highly optimistic about its future. Others say it’s a bubble, and predict a huge crash.

Bitcoin is the type of opportunity that may be likely to appeal to some service members due to the intrigue that surrounds the concept, as well as the excitement of an opportunity that some see as “the next big thing.” You may also see or hear of people offering affiliate links that give others a discount on their first bitcoin purchase. These discounts are tiny compared to the risk involved.

Be aware that bitcoin is not the only cryptocurrency out there, though it is still the most well-known. Ethereum and Litecoin are the two most well-known alternatives, but thousands of other cryptocurrencies exist. In generally, even less is known about these currencies than bitcoin.

Finally, don’t forget that bitcoin gains are taxable. Just like gains from the stock market, gains from bitcoin sales must be reported at tax time. You can find out more here.

Here is some info from the Consumer Financial Protection Bureau about bitcoin and virtual currencies:

Risks to consumers posed by virtual currencies

What are virtual currencies and what should I know if I’m interesting in using one?

References:

Consumer Financial Protection Bureau. (2014). Risks to consumers posed by virtual currencies. Retrieved from http://files.consumerfinance.gov/f/201408_cfpb_consumer-advisory_virtual-currencies.pdf

Consumer Financial Protection Bureau. (2016). What are virtual currencies and what should I know if I’m interested in using one? Retrieved from https://www.consumerfinance.gov/ask-cfpb/what-are-virtual-currencies-and-what-should-i-know-if-im-interested-in-using-one-en-1893/

Leave a Reply

Your email address will not be published. Required fields are marked *