Yesterday, Bitcoin hit yet another all-time high of $2779 per BTC, before retreating nearly 20% by afternoon… and gaining more than half of that back in the overnight!
Does this sound like your kind of investing? Are you ready to make and lose thousands of dollars in a matter of hours? If so, cryptocurrencies may have a place in your wallet.
Created by a shadowy figure named Satoshi Nakamoto, Bitcoin originated as an economic experiment, virtual coins worth about $0.10 apiece, which could be “mined” by your computer crunching through math equations while you slept.
Once you have bitcoins, they go into a “wallet,” a computer file that holds the bitcoins and the encryption keys to access them. While this wallet and its address uniquely identifies your bitcoins, it is also fully anonymous: it has no connection to your name, your bank account or your offline identity unless you choose to share it.
Each bitcoin also retained a comprehensive history of every time it was ever spent, known as the “blockchain”, a file publicly available on the internet that outlines the history of the currency as a whole, and also serves as verification that your bitcoin is authentic.
Due to the nature of the currency, many early adopters were involved in illegal activities, particularly hacking and the drug trade, giving it a somewhat sketchy reputation and delaying its acceptance as an investment, even as its value skyrocketed through a series of speculative bubbles.
These bubbles were particularly concerning for Bitcoin because the currency is inherently a fiat currency (not exchangeable for anything of fixed value from its originator), basically rooted in the notion of its own scarcity, and faith in the internet always having a use for it. However, unexpectedly as it seemed at first, the bitcoin rush only accelerated, with a steady increase in value paralleled by massive increases in mining computer power and expenditures and positive media coverage until a single coin was worth hundreds of dollars by 2015.
As is the case with nearly anything of value, though, secondary markets arose almost immediately to trade bitcoin for the sake of trading, and allowing another means of acquisition besides mining. Trading something ordinarily only available on the internet introduced its own complexities, however, and the early markets included a few notorious bad actors like MtGOX, which abruptly disappeared near one peak in a heist of hundreds of millions of dollars in Bitcoin.
Despite the risk, which has been declining in the last few years with a marginal increase in regulation, and much greater awareness, the incredible gains realized by Bitcoin so far are hard to ignore. An investment of just $400 at the start of Bitcoin trading would be worth $2.5 million now, far ahead of any stock or commodity. And while Bitcoin also makes sharp moves based on events in its own community, a trend has begun to emerge where, like commodities and bonds, its value rises with geopolitical uncertainty and moves oppositely to the stock market.
It should be obvious, though, that past returns are no guarantee of future performance, especially at anything near that level, and that such extreme returns are paralleled by higher short and long term risks. Similar rushes have occurred at the introduction of more recent cryptocurrencies like Dogecoin and Ethereum, providing another potential path to profit for those with the technical knowledge required for mining, or the funds to gamble on what could be pure speculation.