One investment vehicle that has received a lot of press in recent years is not a physical item or a stock-it’s cryptocurrency. Of the many types of cryptocurrency available on the market today, perhaps the most popular, recognizable, and valuable is Bitcoin.
Bitcoin intrigues a wide variety of investors, from those with small portfolios to the extremely wealthy. But what exactly is Bitcoin, and should you consider putting your money toward it?
Understanding Bitcoin and its appeal
Bitcoin is a completely digital form of currency that is bought and sold online. It has no physical component and is mathematically generated. The currency is bought and sold through a peer-to-peer network, not through the government or a bank, and it is stored in a digital “wallet.” Bitcoins are represented by strings of code that must be saved by the owner. Volunteer coders run the Bitcoin network, keeping it decentralized.
A small number of bitcoins are periodically released, but there will ultimately be a finite number of bitcoins available in the world: 21 million. The currently unreleased bitcoins are being “mined” by datacenters around the world using a process that simultaneously helps to run the entire system of transactions.
You are able to earn bitcoins in numerous ways, but the most common way to obtain bitcoin currency is by purchasing it on a bitcoin exchange, where you can pay traditional currency for bitcoins owned by others.
Bitcoin is now able to be exchanged for traditional currencies around the world and is accepted at many companies as a form of currency. In the United States, bitcoins are considered assets and are subject to capital gains taxes after all transactions.
The potential risks and benefits of Bitcoin investment
“Bitcoin has become an investment phenomenon since its inception in 2009,” says Samuel Rad, Financial Advisor from Los Angeles.
The currency is often considered an alternative to traditional commodities like gold or cash. The Bitcoin network has steadily grown since its creation, and many investors believe in the future of the cryptocurrency, while others aren’t so sure.
In the past few years, the value of bitcoin has appreciated significantly, drawing the attention of investors. However, there are positives and negatives to bitcoin investment, especially this late in the game.
- Bitcoin’s value tends to escalate over time, despite wild fluctuations in the market. Its high value makes it appealing to investors seeking non-traditional investment approaches. Many investors hope it will be highly profitable in the long term.
- Bitcoin is decentralized and free from government intervention. It is also extremely transparent due to the way all users have access to the Bitcoin “ledger.”
- Bitcoin is only a decade old and, thus, lacks strong credibility and has no guarantee of longevity. Investing in bitcoin can be extremely risky and is only appropriate for investors comfortable with this high risk.
- Because of the nature of digital transactions, bitcoin investors may experience security risks. Some investors have had millions of dollars’ worth of bitcoins stolen from their online accounts by hackers.
- Bitcoin is subject to market risk, just as other investments are. The bitcoin market rises and falls, often in extremes, and the value of bitcoins can see dramatic changes over short periods of time. While some believe in bitcoin’s escalating value, others think that bitcoin could be worth nothing in future years.
Is bitcoin a worthy investment for you? Nobody can say for certain, but it appears that bitcoin investment may be most appropriate for those with more money to spare. Wealthy investors may be able to invest a small portion of their funds in bitcoin without putting their entire estate at risk. With careful market observation, some believe that bitcoin could potentially turn a hefty profit; however, you must always remain wary of the risks involved.
Before taking major risks with your wealth, seek the guidance of a Certified Financial Planner in Los Angeles. Understanding the status of your estate is important to prepare for retirement and beyond, helping you make more informed decisions when it comes to your investments.