Should I Invest in Bitcoin?

There has been a surge of popularity of cryptocurrencies among Filipinos with many buying or investing in Bitcoin. Since its inception in 2009, early adopters of Bitcoin have made a lot of money like celebrities Ashton Kutcher, Paris Hilton and Floyd Mayweather. This earlier this month, another record was broken with one (1) bitcoin being worth US$6000 (versus the price in July 2010 at US$0.06 per bitcoin). With the significant price increase, it seems like investing in bitcoin is a fast track to getting rich.

Honestly, this bitcoin mania has reminds me of the 17th century tulip bubble. (What is the tulip bubble? In the 1630s, people went crazy over tulip bulbs (yes, the flower) and they became so valuable that investors used their houses as collateral to buy them, but when the bubble popped, many lost all their money.)

However, with this lesson in history, the bitcoin remains enticing to the less risk averse investor especially with the millennials. If you are one of those being plagued by the eternal fear of missing out and wondering why you haven’t thought of joining the cashless revolution, let’s talk about what Bitcoin is and if it makes sense for you to buy or invest in it.

What Is Bitcoin?

Bitcoin are what are known as digital currencies. They don’t involve traditional banks, their value is not determined by governments, and they provide for anonymous transactions (for the most part). They aren’t printed like the traditional bills or coins we think of, instead they exist in a digital format (think 0s and 1s) and are traded electronically.

The system is designed to be peer-to-peer – money goes from one account to another without a middleman or a bank getting involved. In lieu of a ledger, all bitcoin transactions are publicly recorded on a “blockchain” run by the network of computers which operate the bitcoin software. Just think of the blockchain similar to a bank records or a passbook with a block that is a part of that blockchain is analogous to a single receipt from an ATM. Previous entries cannot be changed on this public ledger, it can only be updated with new entries. Also, all transactions are recorded in a shared public ledger which is available to all computers in the network.

Why Do People Use It?

In the Philippines, bitcoins are used to send money, buy load and pay bills. There are 3 Major Bitcoin Platforms in Philippines namely Buybitcoin.phCoins.ph, and Rebit.ph. Otherwise (hopefully not in the Philippines), due to its high degree of anonymity involved, it’s predominantly renowned for being used for money laundering and other illicit activities.

I Heard People Become Rich from ‘Mining’ Bitcoins. How Does That Work?

Bitcoin mining is the process of making computer hardware do mathematical calculations for the Bitcoin network to confirm transactions and increase security. As a reward for their services, Miners collect transaction fees for the transactions they confirm and are awarded bitcoins for their services. Mining is a specialized and competitive market where the rewards are divided up according to how much calculation is done. Not all Bitcoin users do Bitcoin mining, and it is not an easy way to make money.

Does It Have A Place In My Portfolio?

Personally, I feel that there is nothing wrong about owning bitcoin or using bitcoin or other cryptocurrencies, you just need to educate yourself before investing or owning these or using these. Here are some things to think about before buying, holding or trading virtual currencies

1. Bitcoins (or any other virtual currencies) not backed or regulated by a central institution or government. So if a virtual currency exchange loses or fails, there is no legal protection that covers you for losses arising from any funds you may hold on the said exchange.

2. Virtual currencies in your digital wallet can get stolen (through hacking). Since the use of virtual currencies is not regulated, there are no existing regulations to protect you in case of unauthorized or incorrect debits made from your digital wallet. Furthermore, you are not protected when using virtual currencies for payment –Payments made through virtual currencies like Bitcoin are immediate, direct and non-reversible.

3. Bitcoin transfers are fast and flexible. They can be sent from anywhere in the world to anywhere else in the world. In the same way, you can use it anywhere in the world. No bank can block payments or close your account.

4. The value of bitcoins are highly volatile. The value of your virtual currencies cannot be guaranteed and can change quickly. If you buy a virtual currency today, it is quite possible for its value to drop (or increase) sharply and permanently the next day. Never invest more than you are willing/able to lose – Bitcoin is a very risky investment and you should keep in that in mind at all times.

Final Thoughts

For now, all I can say is that bitcoin is still fairly new, too speculative and volatile. By all means dabble in it IF you have the funds, but don’t invest (or gamble your money) so much into it. This might be a good way to get exposure but if things go the wrong way, you’ll feel much better having a diverse portfolio of investments to help mitigate your losses. Otherwise, you can use bitcoins if it’s going to make your money transactions much easier.

BTW, if you haven’t heard, I’ve just released my first ebook- A Millennial’s Guide to Investing. It’s a digital book to help you learn about investing. Great for beginners and newbies!

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