If you’re like many people I’ve talked to recently, you might be asking yourself “Should I buy bitcoin?” and then “How would I even do that?”
As is true with email, no company owns the bitcoin network or its blockchain technology. Therefore, to invest in bitcoin, one must buy the coins.
The limited supply of bitcoins can increase excitement and prices. Its lack of regulation is one of many factors that can increase risk. Let’s look more at supply and risk before diving into whether to and how to invest.
Why is bitcoin supply limited?
Bitcoin’s original (largely unchangeable) programing allows only 21 million bitcoins to be created. Market Watch reports that nearly 90% of these coins are already in circulation. Bitcoin mining will create the balance over a period of years.
Miners set their computers to solve complex mathematical problems. Solving these problems is what verifies bitcoin transactions. It also makes new bitcoins in the process, a portion of which go to the miners, leaving the rest available for sale.
We can only speculate as to who owns the bitcoins in circulation because anonymity is a cornerstone of cryptocurrency. Some owners appear to own large positions. As of Feb. 11, 2021, Market Watch estimates that 8 out 10 holders are long-term investors, which leaves 20% for purchase.
Of course, limited supplies can increase excitement, creating the urge “to get in now,” and that can increase prices. High profile buyers also increase excitement. For example, Tesla announced a purchase of $1.5 billion of bitcoin in February 2021.
What are the potential risks of cryptocurrency?
Bitcoin, created in 2009, has experienced growth spurts and challenges — just as a 12-year-old child has. And its longevity and potential for success is just as difficult to predict as it would be for said child. To compare to an earlier technology shift, will bitcoin go the way of Apple and Google or of Compaq and Netscape?
The risks of bitcoin and other cryptocurrencies include:
- It lacks the backing of a central authority.
- The opaque ownership structure allows transactions and ownership to be hidden.
- It lacks regulation. This may be a selling point for some investors, such as people with an anti-institutional or anti-establishment bent. But it means regulations can change or be added in the future, which could change the value of current holdings.
- Operational challenges have resulted in hacking and theft.
- It is extremely volatile. For example, 1 bitcoin was valued at $19,141 in December 2017, but dropped 83% to $3,253 within a year.
- Lack of patent protection. Because nobody owns cryptocurrency technology, anyone can copy it. The industry is likely moving toward the types of patent wars we’ve seen in the cell phone industry, where an application is changed slightly, then patented, then argued in court. Many well-known companies are filing for cryptocurrency and blockchain patents, including Visa, Alibaba, IBM, Bank of America and Walmart.
How do I buy cryptocurrency?
To buy bitcoins or other cryptocurrencies, you simply open an online account, just as you would a bank account.
While thousands of cryptocurrencies exist, many of these have no following or trading volume. Learn more about popular cryptocurrencies you can buy.
When you buy cryptocurrencies directly, you can buy them by the fraction. In the case of bitcoin, fractional shares can start at as little as $100, with the minimum purchase set by the provider of the online account.
You can also purchase cryptocurrency through an ETF or fund. Of course, expenses, risks, and minimums apply. Please consider these factors and the prospectus carefully before investing.
How do I invest indirectly?
A third option is to get involved indirectly by investing in companies that are making a big push into cryptocurrency.
For example, Mastercard recently began accepting cryptocurrencies and has a trove of cryptocurrency patents. Its president, Michael Mieback, said these patents put the company in a good position if government-backed cryptocurrencies (called central bank digital currencies) come to fruition.
Seeking individual companies who are experimenting with cryptocurrencies carries its own risks and is difficult to predict. We believe the best way to choose a specific company in which to invest is the time-tested method of determining if it is well run (including any experimentation in cryptocurrencies) and if the price is appropriate.
The broadest indirect investment is to invest in a well-diversified portfolio. Just as email and inexpensive long-distance calls have made most companies more productive, so will crypto technology as it matures and if it delivers on its promise — paying off for everyone in the long run.
Note: This post is provided for informational purposes only. It is not a recommendation on whether to invest in cryptocurrency or any other type of investment.
Laura is a Senior Wealth Manager and the Founder of LWP. She has a master’s degree in tax and is an excellent listener. While she is a sophisticated financial planner with experience in complex issues, her priority is ensuring a financial plan works for people.