What is Bitcoin and should you invest in it? An expert explains.

Question…

Hi Tash, all I keep seeing in the news and on my Facebook feed is Bitcoin, Bitcoin, Bitcoin. Can you tell me what all the fuss is about? And more importantly, whether I should actually considering investing in it?

Answer…

All I seem to see in my feed is Bitcoin too! And it’s no surprise – this year alone the value of Bitcoin has gone up from around $1,000 AUD at the start of the year, to reaching a record high of $23,000 just this week.

As you can imagine, it has many people wanting a piece of the action and diving in, with the FOMO (fear of missing out) phenomenon largely attributed to what’s driving the unprecedented price gain.

But, is it a good idea and should you be giving it a go too?

Let me answer that question by starting at the very beginning with a very basic crash course.

What is bitcoin?

Bitcoin is one of many cryptocurrencies, that is, a currency that only exists digitally not physically. It came about because developers were trying to solve an issue known as “double-spending”. Digital currencies, like Bitcoin, are effectively just another form of digital file.

Say you save a word document from a website to your computer, then you copy it to a USB and email it to a few friends – multiple copies of that file would exist in different places, right? Now imagine that file was currency. If you can copy it multiple times then it could easily be spent multiple times. This is the double-spend problem. And bitcoin, along with the blockchain system, were developed to solve it.

What is blockchain?

Bitcoin requires all transactions to be included in a shared log known as a “block chain.” This process involves a lot of number crunching using complicated algorithms, and the transactions are recorded in lots of different places making it very difficult to duplicate, falsify or “double-spend”.

Should you invest in it?

This is a question that is dividing experts far and wide! While most can agree that cryptocurrency is here to stay, everyone is still learning how exactly it will be applied (and valued!).

There are a few significant risks associated with cryptocurrencies at the moment, so make sure you weigh these up carefully against the potential for making a lot of money in the short term:

• The space is currently unregulated and not backed by a government like our traditional currencies are.
• There is always the possibility of exchanges being hacked (which has happened) and as a result you could lose your investment.
• Bitcoin is not the only cryptocurrency around so another could enter the market and cause Bitcoin to decrease in value.
• If you lose your Bitcoin “wallet” (often a physical drive, and this has also happened!) you lose your Bitcoin altogether and they cannot be retrieved.
• The volatility of the market means that you may be a Bitcoin millionaire today, and then have nothing tomorrow. (In fact, the price can fluctuate significantly even during the sale process).

Listen: Scott Pape's best financial advice for single women. (Post continues after audio...)

• Don’t risk money you can’t afford to lose. Ensure you have emergency savings and don’t risk money that you will need at a set point in time e.g. your house deposit.
• Don’t invest in something you don’t understand. Always do your research first.
• Don’t put all your eggs in one basket.
• Know your risk tolerance. Make sure you can handle the stress of your investment dropping in value significantly over the short term.