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7 Things To Know Before Investing In Bitcoin

Wayne Duggan

Over the last three years, bitcoin has become a household word in the financial community.

The cryptocurrency rose from an obscure curiosity within the tech world to a popular investment and topic of debate on Wall Street. Some investors even consider bitcoin to be a safe haven investment, similar to gold. Here are seven things to know before you invest.

1. Bitcoin’s Origins Are Unclear

Bitcoin was created in 2008 by a person or persons using the pseudonym Satoshi Nakamoto. Nakamoto reportedly published the proof of concept for bitcoin in a cryptocurrency mailing list before leaving the project to other developers.

The cryptocurrency community has several theories about Nakamoto’s identity, but they remain unconfirmed to this day.

2. Bitcoin Is Pseudoanonymous

One reason bitcoin has become so popular: users can send and receive cash without ever using any personally identifiable information.

Yet each bitcoin transaction is logged along with an address that is forever linked to that transaction. If users use the same address for multiple transactions, all the transactions are linked together.

If a person’s connection to that address is ever leaked or discovered, all of his or her transactions will be revealed.

3. Bitcoin Is Decentralized

In contrast to fiat currencies like the U.S. dollar and the Chinese yuan, bitcoin is decentralized, meaning it's not controlled by a central government or other entity.

The pros of a decentralized system include the idea that cryptocurrencies can’t be seized or devalued by a central authority.

The cons of decentralization include the fact that there is no government or other entity backing the value of the currency — and there is nothing limiting access or use of the cryptocurrency.

This lack of access, coupled with the pseudoanonymous nature of bitcoin, has led to a surge in criminal activity.

4. Bitcoin Is A Real Currency

Despite its decentralized nature, bitcoin is a real currency in the sense that users can use it to easily buy goods and services. Companies like Microsoft Corporation (NASDAQ: MSFT), Expedia Group, Inc. (NASDAQ: EXPE) and Newegg are among the companies that accept direct bitcoin payment.

5. Bitcoin Investors Have Limited Options

Unfortunately, the Securities and Exchange Commission and other financial regulators globally have been extremely cautious when it comes to cryptocurrency investments.

The SEC has repeatedly denied and delayed applications for a bitcoin exchange-traded fund, citing concerns over investor safety and lack of market liquidity.

Today, bitcoin investors must get creative by either buying it directly from a cryptocurrency exchange like Coinbase; from a broker like Robinhood; trading Bitcoin futures; or buying bitcoin from other sources, such as cryptocurrency ATMs.

The Grayscale Bitcoin Trust (OTC: GBTC) is also an option, but it's not approved by the SEC and does not trade on a major U.S. exchange.

6. Bitcoin Is Extremely Volatile

Bitcoin investors often compare the cryptocurrency to gold as a safe haven and hedge against fiat currency inflation.

In reality, bitcoin and other cryptocurrencies are extremely volatile and unpredictable in the near term. The 30-day rolling volatility of the GBTC fund is 125.2% compared to 16.7% for the SPDR Gold Trust (NYSE: GLD) and just 7.6% for the SPDR S&P 500 ETF Trust (NYSE: SPY).

7. Bitcoin Has Some Powerful Critics

Investors buying bitcoin are going against the advice of some extremely powerful voices on Wall Street. Warren Buffett has called Bitcoin a “mirage” and “rat poison squared.”

Former Federal Reserve Chair Janet Yellen said Bitcoin is a “highly speculative asset” and “not a stable store of value.”

President Donald Trump recently said he is “not a fan” of bitcoin and said its value is “based on thin air.”

Bitcoin was trading at $10,096 at the time of publication Thursday.

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