Demystifying Bitcoin

Can a virtual currency bring investors real world profits?

You can’t put it in your wallet or deposit it into a conventional bank account. Its origins are clouded in mystery, and involve a person or persons who launched it under a pseudonym. It was recently at the center of a Twitter scam that duped people into sending thousands of dollars’ worth to various celebrities, under the belief that their money would be doubled. The celebrities’ accounts had been compromised and they’d made no such promise, so those who fell for the con lost their money.

Oh, and even though what we’re talking about – cryptocurrency – is a currency, most people who acquire it don’t use it to buy things. Instead, they regard it as an investment, which is why it has earned the nickname, crypto-asset. Is it an investment you should consider? Financial experts are divided on whether or not it is stable enough and will last long enough to be worth the risk, although several recent pro-cryptocurrency recommendations from notable investors seem to be tipping the scales in its favor.

I’ll take a look at what investment influencers are saying about cryptocurrency, but first, a quick lesson in what it is and how it works.

What is Bitcoin?

Since Bitcoin first appeared on the financial horizon in 2009, heralding the arrival of something genuinely new, it has both intrigued and confused the public. As a concept, cryptocurrency is not an easy one to wrap your head around. In simple terms: a cryptocurrency is a digital alternative currency that exists online. It is not issued by a government, so it is not legal tender. That also means that governments cannot interfere with or regulate it – so far, anyway. According to its critics, that lack of government involvement has led to it being used for some nefarious and illegal purposes. More on that shortly.

Although thousands of other types of cryptocurrency have appeared in the marketplace, with names like Litecoin, Ethereum, Ripple, Stellar, NEO and Cardano, Bitcoin remains the most ubiquitous, and the one most championed by pro-crypto advisors.

What moved Bitcoin from the theoretical category to one with practical applications is blockchain technology, which was outlined by Satishi Nakomoto – the person or group mentioned earlier. Blockchain is an encryption method used to ensure that users cannot counterfeit bitcoin or spend it more than once. Blockchains are a way of keeping an online ledger of transactions based on a network of individual nodes that verify new blocks – or uses of a cryptocurrency token – before a transaction can be completed.

Cryptocurrency pros

Privacy. Governments do not have access to your financial information as regards cryptocurrency. This feature can be extremely important for some people, such as activists living in countries with repressive governments. However, it can also lead to one of the items on the “cons” list.

Cryptocurrency is seen by some as a hedge against inflation.

Bitcoin, specifically, is gaining acceptance as an actual currency. Microsoft, AT&T and Overstock accept payments in it. You can purchase your ticket into space on a Virgin Galactic spaceship with it. Here on Planet Earth, you can buy food using bitcoin from some Burger King outlets in Venezuela and Germany. Additionally, KFC Canada has experimented with allowing customers to pay for special “Bitcoin Buckets” – presumably of chicken – with it. Are these and other bitcoin-friendly businesses a sign of things to come? Or a fad that will pass? That remains to be seen.

Cryptocurrency cons

Illegal use. All that privacy makes it possible for cryptocurrency to be used for money laundering, tax evasion and other crimes. However, blockchain has made it possible in some instances to trace the transaction histories and arrest the perpetrators.

Virtual danger. The loss of a hard drive could mean the loss of your cryptocurrency, if you don’t have a backup copy of the private key you use to sign off on each transaction. And, while blockchains are secure, the virtual “wallets” and exchanges in the system are not. They can be – and have been – hacked, resulting in significant losses.

Price volatility. In its short history, bitcoin stock has been about as stable as a ball bouncing around in a pinball machine. For instance, within a four-month stretch in 2013 it went from trading at $13.50 to $220 and then to $70 per coin. In the years that followed, other rallies and crashes occurred, some of them fueled by growing pains such as problems with cryptocurrency exchanges. Bitcoin rose to new heights ($20,000) in late 2017 before plummeting to below $3,500 a year later. A similar pattern occurred in 2019. Bitcoin was hit hard by the market crash in 2020 – as were so many stocks – but has shown a dogged resilience, rising steadily in value during the past few months.1

What the financial pros say

A number of investment experts – like Citadel’s Ken Griffin2, Yale Professor of Economics Ken Schiller3 and Alibaba’s Jack Ma4– are skeptical of the hype surrounding cryptocurrency and warn that Bitcoin could be a bubble.

However, the recent endorsements of Bitcoin from some high-profile investors have caused a considerable stir in the financial world.

Paul Tudor Jones II of Tudor Investment, who is responsible for managing some $40 billion in assets, said he’s added a small percent of Bitcoin to his portfolio. Although he admitted that Bitcoin is speculative and still fairly new, Jones pointed out that government-backed currencies tend to decrease in value over time.

Author Robert Kiyosaki, whose 1997 bestseller, “Rich Dad, Poor Dad,” highlighted the need for financial literacy, has also jumped aboard the crypto train. On his “Rich Dad” radio show, Kiyosaki said Bitcoin is the future, while conventional investment choices like real estate and gold are the past. He predicted on Twitter that bitcoin prices will skyrocket during the next three years, from its current level of a little over $10,00 to $75,000 USD.

My take on investing in cryptocurrency

It is a risky investment but one that holds a great deal of promise. If Bitcoin continues as it has since its inception it will be a wild ride. Investors who are willing to endure the ups and downs may well be rewarded with big gains.

Your PROFITABLE ACTION STEP this time around: Review your portfolio. Is there a stock or fund that is underperforming? Consider selling all or part of it and buying a cryptocurrency stock. Because of the risk, though, Bitcoin or any other cryptocurrency stocks should only comprise a small percentage of your portfolio.