What is Bitcoin?

April 8, 2024

Bitcoin continues to grow in popularity in the investment world. The subject of Bitcoin (aka cryptocurrency) can be wildly confusing, yet highly intriguing all at once.

This guide will merely scratch the surface on Bitcoin, as I am myself am continuing to learn. I will attempt to simplify this very complex topic, and I highly encourage you to explore additional resources. Hopefully this guide will enhance your understanding of Bitcoin as an investment vehicle.

So, the next time you encounter the coworker or brother-in-law that's obsessed with Bitcoin, you'll have some idea of what the hell he or she is talking about!

What is Bitcoin?

The answer is neither simple, nor short! Foreign terms like blockchain, decentralization, mining, and halving are often used when discussing Bitcoin. If you're completely new to Bitcoin, here are some basic bullet points:

  • Bitcoin is a form of digital currency. Consider it "virtual money".
  • Bitcoin was established in 2009, and currently represents about half of the entire cryptocurrency market.
  • It is not controlled by an authority, such as a government, making it decentralized. Instead, a computer network (that anyone can join) collectively mange and secure the crypto network.
  • Again, it only exists DIGITALLY, meaning there are no physical “Bitcoins”.
  • Bitcoin has a limited supply, as no more than 21 million Bitcoins will exist.  This known scarcity is a major factor behind Bitcoin's bull case to appreciate in value.
  • It's completely legal to use, hold, transact, and trade Bitcoin. It’s now an acceptable form of payment by a growing number of businesses, including Microsoft, Home Depot, & AMC.

Is Bitcoin a Good Investment?

First, it's important to understand how cryptocurrencies trade. Unlike the stock market, the crypto exchanges do not have set trading hours (trades 24/7, 365). Crypto is like the stock market on steroids!

A widely-accepted form risk measurement in the investment world is called standard deviation. Simply put, it's a calculation to measure how volatile the price fluctuations of an asset can be. The higher the number, the higher the risk.

For reference, over the past 5 years, the standard deviation of the bond market has been a 6.2%. The stock market has been 18.3%. And for Bitcoin....a standard deviation of 70%!

So, stocks carry about 3x the amount of risk of bonds, & Bitcoin is nearly 4x riskier than stocks! (Please note this is based purely on standard deviation, and other risk factors should be considered).

All of the above details aren't inherently good or bad. Instead, they're important characteristics as you consider investing. And like any investment, determining if it's right for you is dependent upon many outside factors.

Let's take a look at Bitcoin's performance over the last handful of years, compared to the stock market:

Total Growth: Bitcoin +1,029%; S&P 500 +107%

There's More to the Story...

While there's no denying the massive profitability of Bitcoin, this 5-year chart leaves out a vital component...

Crypto tends to experience wildly volatile price movements on a regular basis. Using the same 5-year time frame from above, take a look at the annual pain that Bitcoin investors have endured as compared to stock market investors:

If you think the stock market's volatile moves are hard to stomach, then Bitcoin probably isn't right for you. If you're still exploring Bitcoin, I think it's important to understand that conflicting statements can be true at the same time:

Bitcoin can be extremely profitable, and yet its totally common for it to drop by 50%+ almost every year! 

My Personal Experience as A Bitcoin Investor

Before I begin, here's my general view on investing. I'm in my mid 40's with a long time horizon. I exercise a long-term investor mindset, meaning I'm willing to accept short-term volatility in exchange for long-term growth. I expect my investments to build my wealth gradually, not get rich quickly.  I took this same approach when purchasing Bitcoin...

I made my first purchase in Bitcoin during the summer of 2021, and have randomly added exposure from time to time ever since. While most of my crypto exposure is in Bitcoin, I also own a few other types (ETH & SOL). I plan to hold it as long as humanly possible. My total allocation to cryptocurrency is ONLY about 2% of my total investment portfolio. I still believe my ability to retire will revolve around consistently investing in the stock market. Bitcoin will serve as a compliment to my primary strategy, not a replacement.

This chart shows the price movement of Bitcoin since I made my first purchase. The price climbed for the fist few months, and then BAM! A 76% drop over the next year. In all, I've made some profit, although it's been quite painful ride!

My current belief is that Bitcoin is as profitable as it is turbulent. I plan to gradually add to my exposure, but ONLY after I have made my planned annual investments in the stock market. Furthermore, I'm investing in percentages that won't greatly impact my overall picture should Bitcoin fail to perform. I fully expect to experience significant price fluctuations for this portion of my investments. My hope is that Bitcoin continues to appreciate well into the future.

How To Invest

There are crypto exchanges where individuals can transact, such as Binance, Kraken & Coinbase.

Investors can now utilize ETF's to gain exposure as well, which continues to evolve. The largest Bitcoin ETF is Grayscale's ticker GBTC (click here for more information). You can purchase this fund through traditional investment accounts, such as an IRA or brokerage account. *Please note that these are not recommendations, nor advice. Do your own research and consult with an advisor before investing.

Personally speaking, I have a Coinbase account as well as a position in GBTC. Both options are expensive when compared to owning traditional "stock market investments". Transaction fees and expense ratios should certainly be considered before making any investment decisions.

Other Considerations

Determining if Bitcoin is right for you is dependent on many factors, like risk suitability, taxes, liquidity needs, and so on. Owning crypto is NOT for everyone, and the risks associated with it far surpass traditional "stock market" risks.

Have a plan! Start small, don't invest what you cannot afford to lose. For aggressive investors in search of significant growth potential, Bitcoin (in moderation) can possibly make sense.

To close, investing in Bitcoin is a unique, turbulent, & exciting proposition that certainly is not for the faint of heart. Should you choose to invest, consider this famous Mike Tyson quote:

If you decide to own Bitcoin, know that you will be "punched in the face" quite frequently. I certainly have, and I fully expect to again in the relatively near future. This is part of the program; you're signing up for a wild ride with extreme highs and lows!

If you're ready to dig deeper, there's plenty of online resources. Here's a link to additional Bitcoin articles on Coinbase's website.

Thanks for reading, tune out the noise, and always be compounding!

Important Disclaimer: The information provided in this guide is for educational purposes only. Nothing here within should be considered specific investment or tax advice. Please consult with a financial advisor and/or CPA when considering investment and tax decisions. Past performance is not indicative of future results. Investments such as Bitcoin carry the risk of loss.

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