Is Bitcoin a great investment opportunity or a risky bubble waiting to burst like 1637's Dutch tulip mania?
Bitcoin's run-up has grown famous. Late Thursday morning, the digital currency was trading for more than $19,000 on exchanges in South Korea, before closing around $16,600 on Bitfinex, a large cryptocurrency exchange. The $19,000-ish price was up more than $5,000 in less than 24 hours. It was up from $12,000 at the start of the week. And it was up from a little more than $1,000 on Jan. 1.
Not to belabor the point, but in 2016 alone the currency gained more than 100%.
Still, in Friday morning trading the cryptocurrency had fallen 7%.
So, should you pile into Bitcoin? If so, where can you buy it? How would you buy it? How would you sell it?
Bitcoin has many skeptics.
Acclaimed investor Warren Buffett declared the currency worthless in 2014. He told CNBC in 2014: "Stay away from it. It's a mirage, basically. ... The idea that it has some huge intrinsic value is just a joke in my view."
Just this month, Vanguard Group founder Jack Bogle told the Council on Foreign Relations to "avoid Bitcoin like the plague."
And former Federal Reserve chairman Alan Greenspan said in 2013 that "you have to really stretch your imagination to infer what the intrinsic value of Bitcoin is," calling the cryptocurrency a "bubble."
Facts About Bitcoin
Yet investors have poured money into the digital currency. Here are some of the basic questions and answers you need to know to decide whether to put your money into Bitcoin or other cryptocurrencies.
- What determines Bitcoin's worth? "Bitcoin is a digital currency with no intrinsic value, (which is) worth as much as people think it's worth — and there might be a bit of herd mentality going on in that regard right now," according to digg.com, an internet news aggregator.
- Is Bitcoin unique? No. There are many cryptocurrencies. David Drake, chairman of LDJ Capital, a New York City-based family office that invests in Bitcoin for clients, estimates there are more than 7,000 cryptocurrencies — which he calls digital assets. But only 200 are traded on exchanges. And only about 10 of those are widely used, he says.
- Can you buy, say, just $1,000 worth? Generally, you can buy any amount that the exchange permits. If you buy an amount of Bitcoin that does not coincide with the price per coin, your ownership would be indicated in fractions of a Bitcoin or as one or more whole Bitcoins plus a fraction, Drake says.
- Where can you buy Bitcoin? Cryptocurrency exchanges. Coinbase.com is the most popular. Other exchanges include Bithumb, Coinmama, BitQuick, CEX.io and Bitstamp.
- How high are exchange fees? They vary. Buybitcoinworldwide.com lists these fees: Coinbase charges 3.99% for using a credit card or debit card and 1.49% for transactions involving a connected bank account. Coinbase's GDX service assesses a 0% fee, Coinmama 6%, CEX.io 0.2%, BitQuick 2%. Bitstamp charges a 0.25% fee, which falls to 0.1% with sufficient trading volume.
- Are there security issues? Yes. Coinbase has gone offline several times due to surges in traffic. Also, cryptocurrency exchanges often don't agree about the value of Bitcoin at any given time. And several exchanges have reported hacker breaches resulting in the theft of millions of dollars worth of Bitcoin. NiceHash reported such a breach on Thursday. Those thefts stole money from individual wallet owners, not from the exchange, Drake says. The Japanese Bitcoin exchange called Mt. Gox reportedly filed for bankruptcy protection in 2014 after $450 million of Bitcoin disappeared or were stolen by hackers.
- How/where can you spend Bitcoin? An increasing number of retailers accept Bitcoin as payment, including Overstock.com, Expedia (EXPE), Microsoft (MSFT), Subway, Zynga (ZNGA), eGifter and Dish Network (DISH), according to 99bitcoins.com. But generally an exchange converts your Bitcoin into traditional currency that you transfer to a bank account, credit card or debit card.
- How does Bitcoin work? Bitcoin users are assigned accounts called "wallets." The status and balance of each wallet is tracked by a network known as blockchain. Blockchain is a public ledger, which shows transactions (without wallet owners' identifications) to all users, which in theory is what keeps transactions honest. Each transaction is "signed" by a secret piece of data called a private key, which proves that a transaction comes from a wallet's owner. Basically, the public ledger shows that the same Bitcoin is being spent only by its current owner.
- Does Bitcoin have a shady background? The vast majority of Bitcoin users are honest people motivated by privacy concerns, curiosity or speculative investment goals, Drake says. But because Bitcoin makes transactions anonymous, it was used by Silk Road, a market facilitating the sale of illegal drugs. Also, Bitcoin has reportedly been the way that some hackers demand ransom payments to release computer systems or data. And skeptics says digital currencies facilitate money laundering.
- Can you short Bitcoin? The start of Bitcoin-based derivatives trading on the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME) will allow investors to short or bet on price declines in Bitcoin. The availability of futures contracts could draw more investors to Bitcoin, possibly boosting its price, though those using futures to hedge or bet on a Bitcoin price decline could put downward pressure on the cryptocurrency.
- Should newcomers proceed with caution? "Absolutely," Drake said. "You should just put in a few hundred dollars for the purpose of getting used to the technology and the interface." He adds that some exchange interfaces are not mass-market user friendly.
- Can retail individual investors compete with professional trades who use sophisticated tools? "If I bought shares of Apple (AAPL), I'd be competing with the likes of Goldman Sachs," said Jay Blaskey, digital currency specialist for BitIRA. "There are always people who have more knowledge than I do. But most trading tools are pretty widely available. As far as I know, few people have a totally unique edge." Any investor can see bid-ask spread and volume information about Bitcoin on exchanges, Blaskey adds.
- Is there a way for individual investors to protect themselves from hackers? Remember those private keys that contain investors' information? Blaskey says that the wallet provider his firm works with copies and encrypts account data including investors' keys, takes the devices offline and stores investors' keys offline. Hackers then do not have access to the keys or other information. "It's like putting money into a bank vault," Blaskey said. One caveat: on a recent episode of the popular TV show "Big Bang Theory," science genius Sheldon Cooper protected his key by moving it to a thumb drive, which he disconnected from his computer. The comedic element? He lost the thumb drive. Don't repeat Sheldon's error.