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What Is Bitcoin And Why Do People Invest In It?

It can 'change your life financially.'
PHOTO: istockphoto

Before 2017 ended, people across several countries have asked Google how they could get rich with bitcoin or how to buy bitcoin. Bitcoin even took the second highest spot on Google’s global news trends in 2017. On social media and even on the radio, people talk about it. Personally, I heard the term in 2013 (nothing spectacular), and heard it again last August when a DJ on the radio reported that bitcoin hit an all-time high of 4,000 USD. This means one bitcoin was equivalent to 4,000 USD, or P205,760. (Bitcoin would then hit an all-time high of 5,000 USD in October, then 7,000 USD in November. It exceeded the predicted 10,000 USD in December, nearly doubling in value to 19,500 USD, or P982,605.)

Big deal? All this money stuff is foreign, boring territory to you? Don’t let it be that way because bitcoin is not only a hot topic. It can also be a potential avenue for you to grow your money, in the same way other people have grown theirs. And the only way for you to know if it’s worth buying into (or to know if it’s all just crap) is learning more about it—what it is, what the risks are, and why others have still invested in it.

What is bitcoin?

Bitcoin is a digital currency created in 2009 by a person (or group of people) with the alias Satoshi Nakamoto. As a digital currency, there are no coins or notes used. All transactions are done digitally. You keep your digital coins in a digital wallet.

More specifically, bitcoin is a cryptocurrency. It has a problem-solving aspect, hence the term. (“Crypto-” from the word “cryptology,” the science of solving codes.)

While money today is produced by a country’s central bank, which manages the supply of money going around and makes the decision to print or withhold more money, bitcoin is produced when it is “mined”—verified and added to a public ledger called a blockchain. To mine bitcoin, a computer must solve a difficult math problem. And when that’s done, the computer owner or miner gets a fraction of a bitcoin as a reward.

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Bitcoin is an asset (a resource that can be owned). Therefore, it has value. What its value is, however, is up to the market; the value can be real/intrinsic or just be speculated. In any case, since bitcoin is an asset, people can invest in it.

Lastly, it’s also a form of technology. The technology (called “blockchain”) includes a software that acts like a public ledger that records all bitcoin transactions (as a string of numbers).

Is it valuable or not?

The value of bitcoin is determined by the number of people that are willing to pay for bitcoin. People can rightly or wrongly valuate any asset, bitcoin included.

As of this writing, one bitcoin is equivalent to 13,685.70 USD, or P688,623.37.

That’s an incredibly high amount for a single bitcoin. It wasn’t always like that, though. It started small, with a value ranging from five to 20 USD. It skyrocketed to nearly 20,000 USD (one million pesos) in December 2017, before dipping to as low as 11,000 USD (P552,860) in just six days! That’s almost a 50 percent decrease in value.

Since that big drop, bitcoin has gone up to 17,000 USD, then dropped to fluctuate between the 13 or 14 thousands.

Critics—bankers like JPMorgan CEO Jamie Dimon—tell the press that bitcoin is a “fraud” that will eventually “blow up.” Dimon believes that people can’t just “invent a currency out of thin air.” Economist and finance professor Campbell Harvey says bitcoin is “an extremely risky investment” because it’s so volatile. Perhaps a stronger assertion comes from the likes of asset manager Bruce Flatt, who says that bitcoin has “no intrinsic value.” Credit Suisse CEO Tidjane Thiam says that bitcoin is “the very definition of a bubble.”

What does that mean?

Because bitcoin’s price rapidly went over its intrinsic value, one day bitcoin’s price will suddenly drop or crash (the bubble will “burst”). That will happen when investors are no longer willing to buy the asset at the inflated price and investors en masse sell that asset.

Therefore, when—not if—the price of bitcoin plummets below the price you bought it for, you lose money. And you can lose a lot, depending on how much money you put into bitcoin and the price you bought it for.

Investing sounds like a bad idea. Why do it, then?

To diversify one’s assets.

Ishmael*, a 25-year-old account manager for a financial services company in the Philippines, feared the volatility of bitcoin and used to think the digital currency was irrelevant. But in August 2017, he bought bitcoin and still has his money there. The price of bitcoin at the time was somewhere between 3,000 and 4,000 USD (153,780 and P205,040).

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He says: “I initially purchased bitcoin to diversify my assets. At the time I had some bonds, stocks, and UITF [unit investment trust funds] from an insurance company. I wanted something riskier that could give me exponential gains. My logic at the time was that it wouldn’t hurt too much if I lose the money because I don’t have a family or any pressing liabilities.”

And Ishmael did find exponential gains in his bitcoin investment. “To date, I have a portfolio gain of about 60 percent. This already takes into account the times I lost money due to a crash or buying at the wrong time.”

What attracted Ishmael to bitcoin is the technology behind it—the blockchain.

He explains: “Today, an OFW who sends money from the US to the Philippines must wire the funds through a bank. This incurs a large fee. Then the recipient has the dollar converted to peso, which incurs another fee. Pawnshops and remittance services charge a large price as well to send money. Blockchain at its best enables large-scale money sending at way more competitive rates. You can do transactions much faster and more efficiently without having to go through the traditional steps that established institutions today do.”

Put simply, you can send money to anyone anytime, anywhere.

And the recipient will get the money instantly. Ideally, bitcoin transaction fees should be low. But recently, they have soared from two USD per transaction in September 2017 to over 30 USD just before the year started. That’s because the network is currently overloaded with people wanting to use the currency, making bitcoin miners prioritize those who can pay more.

It’s the future of currency.

Isha* works in financial technology in Australia, and because of that, she believes she’s generally open to financial innovations like bitcoin and other cryptocurrencies more than other people are. She invested in bitcoin in November 2017, buying it when it was priced at 10,000 AUD (P384,800).

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She shares, “Our office has a bitcoin ATM, and I saw the price jump every day—from 2,000 AUD to 5,000, then to 6,000 AUD. And when bitcoin was equivalent to 10,000 AUD, I thought I had to invest, so I bought.”

Isha says she’s doubled her money in a matter of weeks through bitcoin. More interestingly, she reveals she’s made more than 100 percent, because she’s invested in other emerging cryptocurrencies: Etherium, NEO, NEM, Siacoin, and TRX, to name a few.

Although aware of the criticism against bitcoin and cryptocurrency, Isha takes them with a grain of salt. “Cryptocurrency is the future of currency. As we continue to digitize data, money will be part of it. And should bitcoin be a bubble and crash, there are loads of other emerging coins that are worth investing in.”

To possibly grow your money.

William, a 25-year-old former trader in Wall Street, doesn’t think that bitcoin can ever replace traditional money. “The value of bitcoin can fall to half later this week and triple by next month. But peso, for instance, realistically wouldn’t. Some might say bitcoin’s volatility is natural because the technology is still so new, but there really isn’t much evidence to support that outside of wishful thinking.”

Moreover, he believes that bitcoin is “absolutely” a bubble. “Everyone is so caught up in buying bitcoin, but nobody is using it for what it’s for: spending on things! It’s like a sold-out condo but with nobody actually living there.” Meaning to say, the high value was merely speculated; it’s really worth nothing, because it does nothing or serves no one.

And it’s actually because of bitcoin’s volatility that no one uses it to buy things: You can spend X bitcoins now for pizza and find out in a few years’ time that you just flushed down 100 million USD for pizza. (True story.)

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Nevertheless, William put his money in bitcoin for the “FOMO on the potential to multiply [my] bank account.”

“There are teenagers who became millionaires off bitcoin. Some people have paid their debts or sent their kids to school. It’s hard to resist the temptation of something that can change your life financially.”

William bought bitcoin in June 2017, when it was less than 3,000 USD (153,780 PHP). His investment has grown four times in just six months.

But since William thinks bitcoin is a bubble, there’s a point that’ll make him sell his bitcoin or stop investing in it. He says, “If I had any common sense, selling when my money doubled would have been the right thing to do, and I would have been very happy. But when you watch your money grow by three times, then four times, your own psychology becomes your worst enemy. So maybe I’ll sell when it comes back down to two times, or when owning a Ferrari becomes more than a dream.”

Some advice from the more experienced:

“Double down on your financial literacy: Understand what you’re actually purchasing (what is bitcoin, what is blockchain, etc.); understand the alternatives (is it better to invest in bonds or a friend’s business?); and most importantly understand the risks. (Don’t put your eggs in one basket.)

“Although, it’s probably more important to pay off your existing debt, keep savings, then find investments. There’s never enough reading and learning to be done. Be wary of trading advice and keep your emotions in check. Losing money, whether it be your initial capital or the gains you had, can wreck your mind and lead to sleepless nights.” —Ishmael

“There are two things you need to do before getting into cryptocurrency or bitcoin: You have to be willing to make risks, and you have to do a lot of research. Understand that all investments like this one come with some level of risk. You really have to be ready to lose money to make more money. Once that’s out of the way, do your due diligence. Don’t go about investing blindly then expect a positive outcome. Involve yourself in discussions, attend talks, network with investors, read up on relevant news online. Be informed before you buy.” —Isha

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“Don’t invest more than you’re willing to lose. Don’t believe everything you read on the internet. Don’t talk about bitcoin at parties.” —William

*Names have been changed 

Stephanie blogs about art on Catchinglight.org. Follow her on Instagram.