Bitcoin is one of a new breed of cryptocurrencies that have appeared in recent years…but what is it?
Bitcoin Investment 101
If you have heard of Bitcoin or cryptocurrency but don’t know or understand what it is or how it works, this page will help introduce you to this exciting new wealth creation opportunity.
Bitcoin is one of a new breed of cryptocurrencies that have appeared in recent years. Cryptocurrencies work like the money you’re used to, but instead of coins and notes in your pocket, these tokens of monetary value are stored as digital assets.
Apart from being completely digital, these digital currencies are decentralize; in other words the various systems monitor themselves, instead of the banks doing it. That has its advantages and its risks, as we’ll see.
Hacker Proof & Blockchains
Cryptocurrencies are software code hosted on decentralised servers. All transaction logs are published publicly so anyone can see and verify them.
That doesn’t mean that everyone can see that you just spent some Bitcoin on a purchase. These transaction logs are an anonymised record, or public ledger if you like, of any deal. This public availability makes it very hard for hackers and fraudsters to create scams using cryptocurrencies.
These public ledgers are called blockchains, and people who use their computing power to verify transactions and create new digital tokens (known as mining) get rewarded with a little bit of cryptocurrency cash for their troubles. The blockchains are securely encrypted, which is where the crypto meets the currency.
This video provides a clear and simple explanation of cryptocurrencies and how they work:
Because these cryptocurrencies are internet based they offer some exciting advantages for investors. However, a word of caution first. There are over 30 cryptocurrencies on the market today, and likely many more in the future. So how do you know which one to choose to invest in?
Before you make any decisions you need to know what each one offers. For a list of cryptocurrencies available on the market today visit Wikipedia.
Because Bitcoin is the first cryptocurrency to appear on the market, and currently one of the most highly valued, we will discuss it here. However, the savvy investor may want to research the viability of investing in other cryptocurrencies as well. The market is wide open today, and anything is possible in the future. Do your research before jumping into this highly lucrative investment market.
Should you invest in Bitcoin?
Bitcoin Trader says that “…the Reserve Bank of Australia, Bitcoin is defined as a “digital representation of value that may be accepted by some parties as a means of payment and can be transferred, stored or traded electronically.” It’s also an algorithm; a digital / virtual / crypto / currency; a chain of digital signatures and a blockchain. These labels describe the characteristics of Bitcoin. But definitions don’t provide meaning.”
The government defines Bitcoin as an “asset” and legislation allows Bitcoin investment in Self-Managed Super Funds (SMSFs). Due to its low correlation across standard asset classes, it instantly diversifies investment portfolios whilst increasing the funds standard return by 1.65 to 7.69%.
Investing in Bitcoin is expensive. The current price of one Bitcoin was hovering around $4,500 in early October, according to Coindesk. This is the current price:
The Fiat system of money creation is based on debt controlled by a central government, bank or authority,. This closed system is not transparent and therefore it is easily manipulated by those on the inside. This creates financial volatility, and increasingly investors are losing confidence in the system leading to rumours of a financial collapse in the future.
Cryoptocurrencies, by their very nature, are completely transparent. The value is set based on a distributed system where everyone agrees on its value and the protocol evolves by consensus. It cannot be devalued, seized or stolen.
Is Cryptocurrency a viable investment for your clients?
This is a question you, as a Financial Planner, will need to discuss with your clients. To do that, you will need to understand how cryptocurrencies work, and how they have performed in the past. We hope this article has opened to door for you to expand your knowledge on this exciting new investment market.