San Francisco
(Financial District), CA

100 Pine Street Suite 1250
San Francisco, CA 94111

by Barbara Beauregard
8/7/2014 1:13:27 PM

What is Bitcoin, and Is it Risky for Investors?

Investing in Bitcoin has been in the news both because of its popularity and its controversies. It has been tied to the black market. There’s been controversy around its originator, and then there was news in December 2013 that China stopped accepting Bitcoin deposits.

Despite everything, people still seem fascinated by Bitcoin – even if they don’t fully understand what it is. Entrepreneurs and investors are especially interested in Bitcoin, especially as an opportunity to grow their business or get capital. But the question that keeps arising is; “should I be investing in Bitcoin?”

What is Bitcoin?

Before diving into that question, it’s best to review what Bitcoin is. Bitcoin is a type of “virtual currency” created in 2009 by a person who used the alias Satoshi Nakamoto. According to CNN Money, Bitcoin allows transactions to be made without banks, so no transactions fees are incurred. Users don’t even have to give a real name.

Bitcoins can be accepted for nearly any type of product or service, and there are no country restrictions since the currency isn’t tied to a particular government or country. Because Bitcoin is not regulated, it’s not ensured by the FDIC.

How To Obtain Bitcoins

Unlike traditional currency, a person doesn’t need to go to a bank, ATM or similar outlet to obtain this currency. Instead, Bitcoin can be purchased via Bitcoin Exchanges like BTC-E. Users can also transfer Bitcoins to each other via a computer or mobile device. This is similar to sending money via Paypal or similar online transaction services.

Once Bitcoins are obtained, they’re stored in digital wallets or virtual bank accounts. These wallets can be used as a savings account or to pay for goods and services – as long as a particular company is willing to accept Bitcoin.

How are Bitcoins Created

Since Bitcoin is not tied to a central government, a government doesn’t regulate when Bitcoins are created. Instead, Bitcoin is created by “miners”. According to BitcoinMining.com, miners are people that “use special software to solve math problems and are issued a certain number of bitcoins in exchange. This provides a smart way to issue the currency and also creates an incentive for more people to mine.”

Should I Invest in Bitcoin?

The answer to this depends on what your goal is. Some people just want to see how it works so they may just invest a few hundred or thousand dollars. Others want to buy Bitcoins in the hopes that the value will rise, and they’ll make money off of their investment.

The Christian Science Monitor guest blogger Trent Hamm feels that people should only invest in Bitcoin speculatively. He writes that Bitcoin is extremely volatile with people buying and keeping Bitcoins, and then selling them when the market is assumed to be high. This can result in “daily 10% swings in value and monthly swings of 30% to 40% in value”.

Plus, the only semi-legitimate Bitcoin Exchange is MtGox, which means that the whole process is largely unregulated.

If a person does want to invest, it’s recommended to just invest a small amount to see how this virtual system works. Bitcoin’s future is uncertain, and investors could lose a ton of money.

Do you have experience investing in Bitcoin? Tell us about it in the comments!

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