Bitcoin- What to Know and Why to Avoid

Bitcoin is a term you hear daily, from the mouths of news anchors, investors, your friends, and family; everyone knows about and is interested in Bitcoin. But despite the popularity, is Bitcoin a good investment? The short answer: no. We’ll discuss the reasons why including:

• You shouldn’t invest in something you don’t fully understand.
• There is a lack of genuine scarcity in Bitcoin.
• High risk regarding government intervention and banning of cryptocurrency/Bitcoin.
• Not many retailers are accepting Bitcoin.
• High volatility

What is Bitcoin?

Bitcoin is a type of cryptocurrency, a form of digital currency that has similar features to fiat currency but with some important differentiations. Like the US dollar or the Euro, Bitcoin has purchasing power and can be used to make purchases at participating companies.

What differentiates Bitcoin from a traditional currency is that it uses an online ledger with advanced cryptography to secure the transactions and you have a digital wallet. Bitcoin transactions can be made at a variety of vendors, and purchases are made without intermediaries.

This means that you don’t have to deal with banks or any people. People send bitcoins to each other using apps or computers (similar to sending cash through Venmo or Paypal.) Bitcoin has been popularized in the media for skyrocketing in value through trading. Use this bitcoin calculator to estimate the annual and total return on any money invested in Bitcoin.

Common Questions:

How do you get bitcoin? You can either buy bitcoin or “mine” bitcoin. You can do this by using computers to solve complex math puzzles. You can buy bitcoin on exchanges like “Coinbase” or “Bitstamp”, but there are concerns about security and hacking.

Where do you keep bitcoin? You store bitcoins in a digital wallet that’s either in a cloud database or on a computer hard drive. It acts as a virtual bank account, and you can send, store, receive bitcoin through that wallet.

Is Bitcoin insured by the FDIC? No. You run the risk of your server being hacked, losing your bitcoin to viruses, hackers, or accidentally deleting them.

What’s the appeal of Bitcoin? Because it’s a cryptocurrency, there are not a lot of regulations and rules. You can make anonymous purchases, and there aren’t high exchange rates because they’re not tied to any country’s currency.

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Don’t Invest in Something You Don’t Understand

One of the first rules of investing is that you shouldn’t invest in something if you don’t know what it is. Bitcoin fits this description perfectly. There are multiple aspects of Bitcoin that are very complex. If you don’t understand why its value is going up/down, how it is traded, what its purpose is, who/what backs it, beware.

It Doesn’t Have Genuine Scarcity

What is often heard with Bitcoin is something along the lines of “you have to get in on Bitcoin as soon as possible! There are a finite number of Bitcoins. Get in before it’s too late!”.

However, the logic of that argument is flawed, because although there are a finite number of Bitcoin (21 million total,) there are also finite numbers of shares for companies like Facebook or Apple. Companies create a finite amount of shares to create that scarcity, yet they could create more if they wish.

This is exactly the scenario at Bitcoin. Yes, there are 21 million total Bitcoins, but who controls that? Is that a true and finite number? How can you prove it?

These are questions that draw skepticism to the idea of Bitcoin’s scarcity. True scarcity is best described with natural resources. Water, coal, gold are examples of resources that have true scarcity. Once they’re all used up, there will be no more of it, unless we find a brand new way to produce it.

Political Challenges

Bitcoin is the “first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen” (Bitcoin.org) The pure existence of Bitcoin is a red flag for the government since cryptocurrencies can be used to circumvent capital controls, be used for illegal purchases, and participate in illicit markets.

Most importantly, it has the potential to completely destabilize economies through undermining the authority and control of central banks.

The government has tried to control Bitcoin like fiat currencies, and even ban it. This prevents a great risk to investors if the government is able to control or even ban Bitcoin. Janet Yellen, the Secretary of the Treasury has been aiming to curtail the use of cryptocurrency.

Even recently, as Biden became president there was a huge sell-off of Bitcoin ($100 Billion,) dramatically dropping the price. Even though Bitcoin isn’t currently controlled by the government, political influences greatly impact its value. If you want to learn more about Bitcoin and the Biden administration, check out MarketWatch’s report. There’s a lot of uncertainty relating to the government regulation portion of Bitcoin.

Not Many Retailers Accept Bitcoin

Although there are a handful of retailers who accept Bitcoin, that number is still really small. Only 2,300 U.S. businesses accept Bitcoin, and although that number may seem high, that’s only 0.06% percent of retailers in the United States.

You may be able to buy Pizza Hut with Bitcoin, but don’t count on it at most retail locations. For a comprehensive infographic on who accepts Bitcoin, check out this blog post from SpendMeNot.

Even if cryptocurrencies start to become more widely accepted, 40% of Bitcoins are held by individuals. These people are holding it long-term. This is contradictory with the fundamental idea of money- that it should be spent. That’s what determines the value of the dollar. But people are holding it waiting for it to increase in value, and then selling it for cold hard cash.

These long-term Bitcoin holders are less about the cryptocurrency as a currency and more as an investment waiting to be sold off for tangible currency. Do people really care about Bitcoin? Or do they care about the value that Bitcoin holds in US currency?

Bitcoin is Quite Volatile

Bitcoin is quite volatile, the value dropping $6,000 in five days. This could be a risk for investors, as you could go to bed and wake up with thousands of dollars lost in value. It’s important to diversify your portfolio and invest in assets outside of real estate.

Cryptocurrency could be that avenue for diversification. If your investing style involves big risk for big rewards, Bitcoin could be an option for you. But if you’re a beginner investor, or you don’t have a lot of money to lose, consider other investment strategies. We have a few posts about how to invest in real estate with no money down, including:

• How To Use Credit Cards to Buy Real Estate
• How to Get Into Real Estate With No Money Down-Seller Financing
• How to Get Into Real Estate With No Money Down- Hard Money and Gift Money

To Summarize…

Bitcoin is something that could be a great investment if you’re okay with the high risk involved. We mentioned the political tangles involved, the volatility, and the lack of mass retailer acceptance.

If you really understand how Bitcoin works, or are okay with not knowing, proceed ahead. You can even check out Bitcoin IRA where you can earn up to 6% interest on your cryptocurrency in your retirement account.

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