Bitcoin (BTC) is a digital currency, more properly referred to as a cryptocurrency, that began in 2009 by some guy whose real identity isn’t known but goes by Satoshi Nakamoto. Transactions using Bitcoin are made solely using peer-to-peer technology. (Stylistic information to know, according to the Bitcoin Foundation: “Bitcoin” refers to the currency as a whole while “bitcoin” refers to the amount of the currency. A man purchased a product using Bitcoin. He spent .39 bitcoin. Referring to the amount of currency as “bitcoins” can also be considered correct.)
But you’re not reading this because you don’t know what Bitcoin is, you are reading this because you want to know how to trade it and hopefully make money. As a disclaimer, the business degree I am actively pursuing is not in investing or finance, so I’m no expert. I started learning and playing around with investing and trading at a young age and my parents still wish they listened to the investment advice I gave them as a 10-year-old, if that counts for anything. I’m no child prodigy, but I’ve picked up a thing or two along the way. Feel free to ignore all of my advice, but don’t be mad if you lose money. You should always educate yourself as much as possible before trading or making any investments, and these are just my opinions.
The first thing you need to know about trading Bitcoin: don’t. Or do. What you do with your money isn’t my business, but hear me out. I have my reasons for trusting Las Vegas casinos more than the cryptocurrency market.
To begin, the biggest issue that I see with Americans trading Bitcoin is the fact many Americans believe we live in a capitalist society, when in reality most of us were never taught what capitalism really is. The United States economy is not based on laissez-faire capitalism of any sort. If the United States were an entirely capitalist country we would have no public schools or public hospitals because there would be no public funding. A person would need to pay a fee every time they called 911 if a crime was committed or a building was on fire. Fanny Mae would have never been bailed out in 2008 using taxpayer money to pay for their fiscal irresponsibility. While the US does have some characteristics of capitalism, it’s not correct to consider the country an entirely capitalist one.
Bitcoin follows an entirely capitalist concept, being one of the first successful digital currencies in the world of its kind. There are no banks or government entities to regulate Bitcoin, and the hands of authority belong to the independent individuals that “mine” it, enforcing the currency’s credibility. The total supply of bitcoin – not expected to exceed 21 million bitcoins – is released to miners at a fixed rate. This rate is declining as the total supply grows.
First, to be fair, let’s delve into the aspects of Bitcoin that you don’t need to worry about.
- It’s a digital currency. This doesn’t matter. Unless you don’t have a bank account, debit/credit card, or PayPal account and instead rely on methods such as burying gold or stashing money between the pages of books (which is the first place you should look after a grandparent dies) you’ve probably used some form of digital currency.
- The fact Satoshi Nakamoto is anonymous. It is presumed his anonymity is for his own protection from media attention, governments wanting to regulate Bitcoin, and criminals after his assets.
- Bitcoin and other cryptocurrency spin-offs known as Altcoins are commonly used for criminal purchases such as illegal drugs from various online markets on Tor’s anonymity network, more commonly known as the Darknet. The illegal actions of others don’t affect you directly.
Just like a mother that tries to teach her child how to make responsible choices, we’ll use the “You can do drugs. But if you do, bad things could happen to you, so while you could be totally fine, it’s not worth the risk” approach to explain why Bitcoin trading is a bad idea.
Reason #1: You’re very late to the party.
As mentioned earlier, Bitcoin began in 2009. In July of 2010, one bitcoin was worth only six cents. The value of bitcoin jumped up substantially in November of 2013, reaching about $980 per one bitcoin. It declined and stayed at a relatively consistent value of ~$300 to ~$400 per one bitcoin until June of 2016, when the value increased to $730. Today, as I write this on December 5, 2017, one bitcoin is worth $11,799.66. What goes up must come down, and Bitcoin has many reasons to decline in value and become a risky investment in very little time.
Reason #2: Altcoins.
Since Bitcoin’s usage has become more widespread, other cryptocurrencies that the average person hasn’t heard of yet have entered the market. As Bitcoin is used more, its anonymity lessens. While it isn’t the most common way of being busted, law enforcement has learned how to track illegal Darknet market purchases by tracing the bitcoin paid back to the purchaser. A cryptocurrency is supposed to serve the social purpose of being anonymous, so if the risk of one’s identity being revealed becomes more prevalent less people will be using Bitcoin and switch to something else. Monero, an Altcoin, has reached a record high value at $240. Namecoin, Peercoin, Devcoin, Bytecoin, Freicoin, Zetacoin, Joulecoin, Blakecoin, Deutsche eMark, Titcoin, Elacoin, MediterraneanCoin, and even one called “Offerings to Cthulhu” are only some of the Altcoins available for use.
Reason #3: Investor alerts.
The Securities and Exchange Commission, Financial Industry Regulatory Authority, Consumer Financial Protection Bureau, and other agencies have issued alerts making investors aware of the risks. Hear them out.
Reason #4: Bitcoin is still a baby.
Bitcoin hasn’t even been around for a decade. It’s still in the development phase essentially meaning as a currency, it’s still learning how to ride a bike… with training wheels. Its youth makes it one of the highest-risk yet highest-return investments, but the risks are so unique that trading it is a gamble. Not only that, but as the currency develops, new risks will bring themselves to light over time so even if you know everything there is to know about Bitcoin today, you might be in for a surprise next month.
Reason #5: Regulations.
Bitcoin, having an entirely capitalistic concept, is a rival to government currency. Governments may seek to regulate. Some already have. Despite the anonymity factor, people in possession of a cryptocurrency aren’t immune to their government’s rules. The regulations, rules, and guidelines for cryptocurrencies are not uniform, which makes things a little uncertain when it comes to how universal Bitcoin really is as well as its longevity.
Reason #6: You’re not protected.
Bank accounts are protected by the Federal Deposit Insurance Corporation. Some investments can be insured. Exchanging bitcoin and accounts holding bitcoin are not protected by any type of federal program and cannot be insured.
Reason #7: Taxes.
Bitcoin doesn’t qualify to be included in any tax-advantaged retirement accounts, and there are no legal options to keep your investments from being taxed. In the United States, Bitcoin is taxed as property (meaning you have to report it, losing the anonymity factor, and failing to report and pay taxes on it means you’re guilty of tax evasion.)
Reason #8: Bipolar tendencies.
In 2013, the value of a bitcoin fell by 61% in one day. In 2014, the biggest one-day price drop was 80%. Imagine that you’re heading to Europe and exchange your dollars for one-hundred Euros at your local airport at 9:00 am. For simplicity of this example, we’ll assume the airport currency exchange hasn’t screwed you over with conversion fees. (As an aside, don’t trade currency at the airport. It’s not worth it.) By the time your plane lands in Amsterdam to make your connection, you can only purchase 20% of what you thought you’d be able to buy in Europe. Maybe the next day the value will increase, but still you can only purchase 40% of what you originally thought you could. You end up spending much more on your vacation than you budgeted for. Next month, you check the value of the Euro and discover if you planned your vacation and exchanged your dollars for Euros two weeks later, you could have afforded to have someone in an ugly chauffeur hat driving a Rolls Royce pick you up from the airport and drop you off at a Ritz-Carlton, where you could have stayed in the most luxurious suite. If Chanel made toilet paper, you could have afforded to wipe yourself with it. You could have brought home fabulous souvenirs for your family and friends. On the last day of your vacation, it’s possible you could have found out your Euro is now worth close to nothing and you choked as you looked at the price of a metro ticket to the airport. Does that all sound surreal to you? That’s Bitcoin.
The bottom line: investing in or trading Bitcoin is a lot like shooting up heroin laced with fentanyl. You could have the most amazing high of your life… or you could die. Taking the risk is your choice, but safer alternatives are available such as mutual funds, bonds, or downing five drinks before playing No Limit Texas Hold ‘Em in Las Vegas.