Bitcoin: High Risk and (Maybe) High Reward


Bitcoin El Arroyo Sign Austin
Photo Credit: El Arroyo in Austin

December has been a month of milestones for bitcoin. On December 7, the value of one bitcoin reached $15,000 USD. Just weeks later, it’s close to reaching a valuation of $20,000.  

While bitcoin is exciting to investors, it’s confusing to the rest of us. We even launched a poll to gauge what people knew about it (spoiler alert: not much).

Does Anyone Know What Bitcoin Is?

Out of curiosity (and our own amusement), we reached out to Twitter users to find out how many of them own bitcoin — or even know what it is.

Out of 2,818 respondents, 366 stated that they own bitcoin, 1,494 said they don’t, and 958 admitted that they don’t know what it is at all.

4 Basics of Bitcoin

  1. Bitcoin is a cryptocurrency, a digital currency that is used as cash (though there’s no physical cash). Other cryptocurrencies include ethereum. You may have heard about CryptoKitties, too. Bitcoin with a capital “B” refers to the ledger, while the lowercase “b” bitcoin is a unit of the currency.
  2. Bitcoin was invented by an anonymous person or group under the alias Satoshi Nakamoto in 2009. The creators capped its circulation at 21 million. There are nearly 17 million in circulation right now, and at current rates, the remaining bitcoins are expected to be mined by 2140.
  3. Bitcoin is decentralized — that is, it’s not tied to any country or government. No single person or entity runs it, which means there is no regulation. It’s maintained by computers and volunteers. (What?!)
  4. Instead, Bitcoin is a peer-to-peer entity which doesn’t use banks to transact. This makes it anonymous and preferable to some over using credit cards, which are linked to personal information. (To some, this also makes it perfect for nefarious activity.)

How Bitcoin Works: The Simple Explanation

Bitcoin is mined (the digital version of gold mining) and released into circulation.

Hypothetically, anybody with the right computer can be a miner. These miners are volunteers who verify bitcoin transactions between users. Simply put, it’s like solving puzzles with hardware and software. (The video below is a great resource for grasping the concept of Bitcoin.)

Another term often paired with bitcoin is blockchain technology. The bitcoin transfers (data transactions) are put into a ledger. Miners verify this data and turn it into a blockchain (a giant database of public records)

Don’t want to mine for bitcoins? You can also purchase them in an exchange, like Coinbase.

Is There a Bitcoin Bubble?

At its peak, bitcoin saw a nearly 2,300 percent increase in value just in the last year alone. 

Bitcoin value changes throughout the year
Chart from Coinbase

In Texas, an attorney running for office launched his campaign using proceeds from bitcoin investments. Tech investors who turned their $800 bitcoin investment into hundreds of thousands of dollars have donated their portfolio to a South Carolina hospital (the exact amount wasn’t disclosed). Companies like Overstock.com, Expedia, and even Subway accept bitcoin. You can even purchase bitcoin futures on the trading floors now.

It may seem tempting to ditch your 401(k) and put all of your savings into bitcoin. However, experts warn that bitcoin might be in a bubble. Warren Buffet stated, “You can’t value bitcoin because it’s not a value-producing asset…it’s a real bubble in that sort of thing.” Buffet isn’t impressed with the volatile valuation at all. “People get excited from big price movements, and Wall Street accommodates.”

Some countries have even started banning cryptocurrencies. China banned Initial Coin Offerings (ICOs) which have been used by startups to raise funds. This is the unregulated version of Initial Public Offerings (IPOs) and leaves investors susceptible to fraud.

In the meantime, as the popularity of bitcoin soars, more retailers will accept bitcoins. Maybe you’ll even be able to buy car insurance with bitcoin, too.