This article has been adapted from the “Ultimate Guide to Bitcoin." Read the full story at MagnifyMoney.com.
Price of a single bitcoin just passed $1,000 in February. It had climbed 15-fold by December, less than one year later, to over $16,000. Travel back another few months, or years, and the windfall for early virtual currency buyers is almost unfathomable.
So, how do you get in on this? And even if you could afford Bitcoin, should you make an investment now?
How to buy Bitcoin
There are two ways to obtain Bitcoins; you can buy them, or you can "make" them, through a process called mining.
New Bitcoins are created, it would seem, out of thin air as a “reward” when computers compete to do the nuts and bolts work of confirming blockchain transactions. Anyone can mine —investor Tom, mentioned above, mines for alt coins using a network in his garage — but as time goes by, the processing power required to mine continues to swell.
Enormous server farms around the world are now devoted to “winning” Bitcoins, using copious amounts of electricity as they do it.
So most people obtain coins by buying them, usually on a Bitcoin exchange, where traditional currency, like dollars, can be traded for cryptocurrency.
The largest bitcoin broker is called Coinbase, which says it now has 13 million accounts — more than stock brokerage Charles Schwab. Coinbase works like an exchange for beginners, but it’s really a front-end for an exchange called GDAX, or Global Digital Asset Exchange, formerly called Coinbase Exchange.
To buy Bitcoin from Coinbase or another broker or exchange, you'll have to download software called a cryptocurrency wallet. The wallet will be used to store the cryptographic keys that are needed to unlock virtual currency value. Coinbase, like other brokers and exchanges, also supports some alt coins, like Ethereum and Litecoin.
People invest in alt coins because they are much cheaper, and theoretically offer a chance at greater investment returns, though they can also be more risky. Not all coins, or all exchanges, are supported by all wallets.
Selling coins simply requires reversing the process. Bitcoin holders use a broker or exchange to move transfer virtual currency back into traditional currency, like dollars. That money is then transferred back to a traditional bank account.
Should you invest in Bitcoin?
It goes without saying that consumers shouldn’t invest money in Bitcoin that they can't afford to lose, or that they'll need for something in the next couple of years. Whether or not you can stomach that risk is a question only you can answer for yourself.
Bitcoin comes with one big risk: virtually no consumer protections. If Bitcoins are lost or stolen, they are gone forever.
As a high volatility investment, impacted by hundreds of factors that create a calculus beyond the capacity of individual investors to compute, it really isn't much different from gambling.
A long list of investing titans, beginning with Warren Buffett, have warned consumers not to throw money at Bitcoin. Remember, fear of missing out can make you do dumb things.
One reason not to avoid investing in Bitcoin: Because you think it has no intrinsic value, it’s not worth anything in the real world, or any those similar arguments. All currencies have this problem. Why is a hundred dollar bill worth $100? Because Uncle Sam says so. If you recycled that piece of paper, you’d get a tiny fraction of that. So dollars have no intrinsic value, either. All currencies — including hard currency, like gold — are ultimately some form of group delusion.
It’s not the intrinsic value that matters; it’s the depth of the “delusion.” As long as people have faith a currency is valuable, it is.
Now, you might not trust the Bitcoin mania, or the exchanges, or your own hard drive, and those would all be sensible reasons to stay away — for now. But people like Willard believe virtual money, in some form, is inevitable.
"Whether Bitcoin, as a brand, lives or dies is ultimately inconsequential. The fact is that natively digital currencies are here to stay and a multiplicity of new digital value possibilities is inevitable," says Willard.
There is wide consensus that the blockchain technology underlying Bitcoin is of real and lasting value. As with so many gold rushes before, the only group nearly guaranteed to make money are — not people digging for gold — but companies selling the shovels to the diggers. While the metaphor is inexact, that's partly why Tom isn't buying cryptocoins, but rather mining for them.
The way he looks at it, even if the coins he mines fall to zero value, he still hasn't lost everything. He still has his servers in his garage.
"I can, as an example, build and sell gaming machines on top of them, and potentially recoup my entire investment if things went sideways,” he says.
In other words, if his cryptocurrency investment fails, there’s always video games.
MagnifyMoney is a price comparison and financial education website, founded by former bankers who use their knowledge of how the system works to help you save money.