First things first: what is Bitcoin and why do I keep hearing about it?
Henry M. Kim: Bitcoin is a type of cryptocurrency, which is digital money that operates outside of financial and banking systems. With traditional money, those intermediaries verify transactions. If you buy something on your credit card, a bank will confirm that you have the funds, for instance. With cryptocurrency that function is performed via an encrypted digital ledger that is enabled by database technology called blockchain. Like other commodities, a cryptocurrency gains value as more people transact with it and believe that others will transact with it in the future, and buy it on that basis. Bitcoin gets so much attention because it was the first cryptocurrency, and it remains the most widely adopted and most valuable.
The inventor is an anonymous person or very likely group of people named Satoshi Nakamoto, who issued the first-ever Bitcoin in . This was not very long after the financial crisis of , which exposed flaws in the American banking system, so the idea was to create a more democratic financial system that is not beholden to these powerful intermediaries.
The value of traditional currency is manipulated by governments using interventions, such as lowering lending rates and allowing more money to flow into the economy. Crypto, on the other hand, has been free and unregulated—at least it was in its origins.
I think it’s best to not believe the hype. The vast majority of cryptocurrencies there are over , now are junk, with a fair number being outright scams. The scams are created by people looking to make money off of eager speculative investors who don’t realize that all they’re buying is hype. A good comparison is the dot-com bubble in the late ’s, when there was so much enthusiasm and investment, but ultimately the bubble burst and almost all of those companies folded.
Bitcoin, along with some other cryptocurrencies, such as , may stay around and perhaps will have an influence on future banking systems—pushing them to lower costs and open themselves up to more collaboration with financial technology companies. But overall, most standard currencies backed by central banks are still stable and aren’t going anywhere.
There are more and more retailers that are accepting Bitcoin—Expedia, for instance—and I think some brands are keen to send a message that they are keeping up with the times. But it’s not very convenient for the seller. What happens when a customer wants to make a return and the value of Bitcoin has doubled in a week?
The vast majority of people who own cryptocurrency own it as a speculative investment, in hopes that it will become more valuable. One Bitcoin was worth a little over a thousand dollars in early , and the value hit almost $, by the end of that year. Last fall, the value of a Bitcoin hit a record high of $,.
It’s easy to be seduced by big gains, but with them comes the potential for big losses. This January, due to pandemic-related declines in the stock market, the value of Bitcoin dropped by per cent. If that was your retirement nest egg, you could be in trouble. If you have a longer investment horizon, cryptocurrency could be an option for a portion of your investment portfolio. It depends on what kind of risk you’re comfortable with.
