Why You Won’t Get Rich Buying Bitcoin
If you’d bought bitcoin just three months ago, you would have tripled your money by now!
You’ve heard that, right? Your friends have excitedly cornered you at a holiday party and explained how rich you could all be if you’d cash out your 401K and pour the money into Bitcoin.
Don’t do it.
Wait, I have to add this next part: I am not a licensed financial planner and nothing in this post should be construed as legal or financial advice. For entertainment purposes only. Your mileage may vary. Remember to spay and neuter your pets.
With that out of the way, you’re not going to get rich betting on Bitcoin. And “bet” is a good word for it.
If I’d just picked numbers 28 36 41 51 58 and the Powerball of 24, last week, I’d have won $350,000,000!
Sure, and. . .
If I’d just bet on 23 Black on the roulette table last month in Vegas, I’d have won 30x my bet!
In hindsight, every bet could be a winner. In hindsight, I’d have bet on the presidential election! Financial planners have a saying,
Past performance is no indication of future results.
So, Bitcoin is a worthless scam, right?
Not exactly. There is no doubt that people have made a lot of money with Bitcoin. But, if you are a little shaky on what exactly Bitcoin is, you should probably not bet your house on it.
First, let’s talk a little about what Bitcoin is. Bitcoin is a cyber currency. There’s no actual “coin.” There was recently a story about a guy who sold a million dollars worth of Chuck E. Cheese tokens as “Bitcoins.” If you think about it, your debit card is a type of cashless currency. You don’t have to have the physical paper money to make a purchase. If the buyer and seller both agree to do an exchange in that currency, you can transfer the money with just a swipe of your card, or typing your card number into a web page.
So, if there’s no actual physical currency, how do you use Bitcoin? Unfortunately, you cannot use it like you use your debit card. There are places you can go buy Bitcoins. They are called exchanges. You give them money and they will sell you some bitcoins. Or, more accurately, they will sell you a portion of a bitcoin, since each “coin” is about $14,000 at current prices.
You can also invest in Bitcoin futures. That’s where you bet on what the future value of Bitcoins will be. Bitcoins and Bitcoin futures are like any scarce or limited resource. If there is a limited supply and more people want it, the price will go up. That’s currently what’s happening with Bitcoin. As more people want to buy it, the price keeps climbing.
There’s another way to get Bitcoins and this is what makes them a somewhat unique cyber currency. You can “mine” Bitcoins. The analogy of mining for gold is actually pretty accurate. But, since Bitcoins don’t live outside of a computer, it makes sense that you need to use a computer to do the mining. Bitcoins are defined by a complex set of numbers and algorithms. You can use your computer to try to run the algorithms and derive the numbers.
But, there’s also a limited number of Bitcoins that can be mined. And, not to shatter any business plans, but the Bitcoins that were easy to mine are all gone. It now takes a lot of computing power to find new Bitcoins. You are not going to let your PC run overnight and wake up to a virtual pot of gold Bitcoins.
Finally, let’s talk about how you spend Bitcoins. The money that is currently being made is in the markets. As people buy and sell the coins and the futures. If you bought a Bitcoin at $5,000 and you sold it at $10,000, it’s pretty easy to see you made money. But, Bitcoins also have a use. They can be used to buy and sell things.
This is the dark underbelly of the Bitcoin story. Bitcoins are untraceable. So, they are very attractive to people who want to buy and sell things without anyone being able to tie their purchase back to the buyer.
There’s a portion of the internet called the Dark Web. It’s the seedy back alleys of cyberspace. It’s the “bad” part of town. On the Dark Web you can buy and sell virtually anything: weapons, drugs, child porn, contract killings, people. It represents the very worst of our society.
By investing in Bitcoin, you are not necessarily supporting the illegal activities that can be purchased with it, of course. Just be aware that currently, the people using Bitcoin for commerce are not buying baby formula and bake sale cookies.
Should you invest in Bitcoins? Sure. as part of a broader, balanced portfolio. There is speculation it could go as high as $60,000 per coin this year. That’s about four times what it is right now. But, there’s also the chance that it will get supplanted by the next big cyber currency and the bottom will fall out. Unlike other investments, there is currently no agency that oversees the trading of Bitcoins. There’s no SEC, FDIC or any other three letter acronym that is interested in making sure that Bitcoin trading follows expected rules of investments.
It is very much: Buyer beware.
Rodney M Bliss is an author, columnist and IT Consultant. His blog updates every weekday. He lives in Pleasant Grove, UT with his lovely wife, thirteen children and grandchildren.
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