Bitcoin “for Dummies”: An Introduction to Cryptocurrency Investing and Its Risks

At the time of this writing, a Bitcoin is worth more than $18,000. For those who are uninitiated to Bitcoin and other cryptocurrencies (like Ethereum, Litecoin or Ripple), here is a bit of context: At the start of 2017, one Bitcoin was valued at approximately $1,000. This means that anyone who invested $100 in a Bitcoin last January could cash out $1,800 today. The astronomical rise in the value of Bitcoins throughout the past year has caused cryptocurrencies to emerge from relative obscurity in recent months; nowadays, the cryptocurrency “craze” populates media headlines and dominates today’s fiscal lexicon.

So, what does the term “cryptocurrency” mean? In short, cryptocurrency is electronic (or “virtual”) currency that exists on a decentralized global computer network. The cryptocurrency system is based on newly-developed, “blockchain” technology, which is an electronic ledger that publicly records these virtual currency transactions. As such, users can send and receive funds electronically on a peer-to-peer basis, without the need for an intermediary like Visa, PayPal or a traditional banking institution. Also, it is critical to understand that despite all the media hype surrounding Bitcoin, it is only one of over 1,000 types of cryptocurrencies available on the market.

You can use cash in your “traditional” bank account to purchase cryptocurrency. You can then use your cryptocurrency to complete business transactions with other users willing to accept this form of payment. Of course, the system also works in reverse, meaning that you can always convert your cryptocurrency back into regular cash and deposit it in your bank account.

Using cryptocurrency as a method of payment can offer many benefits. Because the currency ledgers are shared by each participating node in the global computer network, electronic transfers of cryptocurrency require low (or no) transaction fees and are less subject to fraud and identity theft. Furthermore, because of the current decentralized nature of the currency exchange, you can easily make international transfers, and it is currently impossible for any government or entity to freeze or seize any of these funds. You can engage in cryptocurrency transfers 24 hours a day, seven days a week, without needing to rely on bank office hours.

As Bitcoin and other cryptocurrencies continue to permeate the financial landscape, the number of entities and individuals willing to accept cryptocurrency as payment for products or services is increasing exponentially. For businesses, the use of cryptocurrency can be an attractive practice because customers cannot reverse payments; in the event of a dispute, clients are dependent on the business owner to reverse a payment via a direct refund. Also, cryptocurrency transfers don’t require the disclosure of personal information, which further secures sensitive information and computer databases from potential hackers. Finally, from an investment perspective, Bitcoin enthusiasts like David Johnson, the CEO and founder of Latium, argue that because Bitcoin technology is structured to cap the number of Bitcoins in circulation at 21 million, its value can only increase (due to limited supply).

While many view the use of cryptocurrency as a safer and more efficient way to execute commercial transactions, many financial advisors also highlight its risks. Some economic experts (including this author) see the meteoric rise in the value of Bitcoins as a “bubble” generated by recent media fanfare and increasing vendor fervor. As with any investment, the value of cryptocurrency is subject to fluctuations. However, cryptocurrencies have been particularly volatile historically. Their values are subject to wild swings on any given day — or in any given hour — making it challenging for even the most experienced, stalwart and risk-loving investors to keep their cool. As with any investment, timing is everything, and many financial advisors believe that the “boom” in Bitcoin and other cryptocurrency valuations could end any day now — and possibly plummet thereafter.

Other common risks associated with cryptocurrency investing include the following:

  • Credit cards can offer more substantial buyer protections than Bitcoins because cardholders can file claims and chargebacks.
  • The future costs and benefits of using cryptocurrency might be subject to unpredictable government regulations. This will require investors to pay close attention to the political and legal landscapes of their respective jurisdictions.
  • Cryptocurrencies — with Tether being one possible exception — are entirely virtual and not backed by any real-world assets (like gold bars, for example). As such, Bitcoins are unsecured, and you cannot carry them around in your pocket.
  • If you lose some or all your cryptocurrency due to hacking or some online malfunction, you’ll likely have no recourse, which leaves you and your funds somewhat vulnerable always.
  • Hackers and scammers are notorious for using phishing tactics to lure Bitcoin holders into visiting malicious websites. Any cryptocurrency investor should be exceedingly conscientious about not engaging with or disclosing any confidential or personal information to any persons or websites that trigger alarm bells.

If you’ve weighed the pros and cons of cryptocurrency and have made a final decision to invest, then the easiest way to do so is by signing up with a third-party, wallet service provider. With the value of Bitcoin being so high at the time of this writing, you’ll be relieved to know that you can buy whatever amount fits your means, even if it’s only a small fraction of one coin. Coinbase, Bitfinex, Gemini and Kraken are some of the most popular cryptocurrency exchange websites.

Signing up for these services is basically the same as signing up on any other website — you simply enter your email address and create a password to get started. To purchase cryptocurrency, you’ll need to connect to your credit card, debit card or traditional bank account. Note that these sites should require you to use two-factor authentication to secure your account, but avoid using SMS or your phone number for this. According to security researchers, criminals can steal from your cryptocurrency wallet using only your name and number. Instead, try a security key like YubiKey or Google Authenticator to verify your account.