Over the past few months I've had numerous people ask me about Bitcoin, cryptocurrency, and whether or not it's something they should be investing in. This week Bitcoin hysteria reached epic proportions as the mysterious asset crossed the $11,000 threshold (meaning 1 Bitcoin is worth 11,000 US dollars). The media loves to make it seem like you're missing out on making your fortune by publishing stories of wild cryptocurrency success. Most notoriously, the famed Winkelvoss twins became the first "Bitcoin billionaires."
(Remember when Armie Hammer was a Winklevoss twin in The Social Network? Lol)
So WTF is cryptocurrency? Well, it's sort of complicated. Cryptocurrency, by definition, is a form of digital money (currency). It uses encryption techniques to regulate the generation and transfer of currency units online. By contrast, regular currency (you know, the dollars and cents we use every day) is regulated by a central bank. Cryptocurrency is not regulated this way, and is thus considered "decentralized."
(I'm trying to explain this in as simple terms as possible, I swear.)
Proponents of cryptocurrency like it for several reasons. First, it's difficult to counterfeit. It's also easy to transfer, trade, and can be moved around without hefty processing fees usually tied to big banks. Most importantly, cryptocurrency isn't issued or regulated by any central authority. This means it is, in theory, immune to government interference and manipulation. Advocates for the new form of money say it's the future for building and transferring personal wealth without fear of restriction or confiscation. It also has the potential to reshape capitalism as we know it.
But it's not all sunshine and roses. Cryptocurrency comes with it's fair share of dangers as well. First, it's potentially a haven for nefarious activities including money laundering and hackers. Bitcoin, the most famous of the cryptocurrencies, has already been the victim of cyber-theft more than 40 times since it's inception in 2009. A few times, more than $1 million was stolen. Yikes.
A computer crash could wipe out entire cryptocurrency balances if a backup copy does not exist. That to me is a huge red flag in a world where cyberterrorism is a very real, and growing, threat. Finally, the exchange rate between cryptocurrencies and other forms of currency can fluctuate a ton. Cryptocurrency is volatile. For example, last week Bitcoin lost one-fifth of it's value in just 24 hours. It has since rebounded, but you better have a strong stomach if you plan on riding this roller coaster (aka a high risk tolerance and risk capacity).
Cryptocurrency is still extremely speculative and high risk. Obviously, the thrill of making a quick return on investment is its most alluring feature. If you are interested in investing in this new-age form of money, do your homework and be very cautious. Don't get wrapped up in the media hysteria.
Remember, a well-diversified portfolio that's built to suit your goals and risk tolerance is the best long-term strategy for investing. Before you invest in cryptocurrency, ask yourself, how does this fit in with my long-term financial goals? Am I taking on too much risk? How does it fit in with my other investments? All investors are different so what may be suitable for one person, might not be suitable for you. I can't tell you whether or not to invest in cryptocurrency, but I can tell you it's a very aggressive investment that comes with an elevated level of uncertainty.
As with any investment craze, buyer beware and do your research before proceeding.
MIT Technology Review