10 things you need to know about Bitcoin
Bitcoin might better be called the antigravity currency because lately it’s been moving in one direction only – up, up and way up. Year to date its value has increased 1,600 per cent to around US$16,000. Nearly US$3,000 of that on a single surge just last week.
Everyone agrees that Bitcoin’s soaring valuations are being fuelled by a speculative frenzy. Stories abound of people emptying their bank accounts and putting all of their available cash into the cryptocurrency in the hopes of getting rich quick.
On the flip side, the Bitcoin bubble could burst anytime, rendering the digital money worthless overnight. History has many examples of currencies that have failed and been relegated to the dustbin, usually because of run on their value in the other direction: down, with a devastating inflationary effect. The Weimar Republic’s disastrous monetary policy and resulting hyperinflation following The Great War reached a crescendo in 1923 when a single U.S. dollar traded for 4.2 trillion German marks. You would need a wheelbarrow of mark notes to pay for a single pint of Hacker-Pschorr at a Hamburg beer hall. Never mind purchasing a Mercedes-Benz or Porsche 911 Turbo. The situation was remedied by the issuance of a new currency, the Rentenmark, backed by bonds indexed to the price of gold.
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A similar situation in Zimbabwe just a decade ago meant that a can of Coke that cost ZIM$50 billion in the morning cost ZIM$150 billion that same night. That situation was finally stabilized when Zimbabwe adopted the U.S. dollar as its official currency, then switched to mobile wallets stored on a cellular phone.
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From an investment and personal finance point of view, Bitcoin is risky. There are however ways to mitigate that risk by investing in companies such as Shopify (SHOP.TSE), PayPal (PYPL.NASDAQ) and Intuit (INTU.NASDAQ), who have exposure to Bitcoin but won’t be ruined if the cryptocurrency fails. To be clear, MoneySense did that piece not so much to encourage investors to grab some indirect exposure to Bitcoin, but to make them aware of how their stock investments may already be being affected by the mania.
We don’t advise playing this mania. But we also know that readers want to understand why it’s happening and how that market is evolving, if only to sound authoritative at your next dinner party. To that end, here are 10 things you need to know.
1. How do I buy it?
Go to a high volume Bitcoin exchange like Coinbase or Vancouver’s QuadrigaCX and sign up for a free account. (U.S.-based Coinbase, the world’s biggest Bitcoin exchange, is presently overwhelmed with demand with as many as 100,000 people per day signing up.) An account will give you a reasonably secure place to store your purchase and tools for converting your local currency in and out of Bitcoin. After you signed up, connect your Bitcoin and bank accounts. This will involve a few verification steps. Once that’s done you’re ready to go. Most exchanges charge a transaction fee of about one per cent. If you’re not comfortable linking your Bitcoin and bank accounts, you can also use a bank wire or credit/debit card to make a purchase. Bitcoin ATMs, often found on university campuses, accept only cash money. The advantage of ATMs is that there’s no waiting for the transaction to clear, compared to three to five business days online.
2. What if I want to mine bitcoins?
As gold can be mined out of the ground, so too bitcoins can be mined by digital means. Anybody can become a Bitcoin miner by running specialized computing tools that help process and confirm transactions on Bitcoin’s peer-to-peer network. Cyber miners can earn transaction fees paid by users or newly created bitcoins issued according to a fixed formula. The more miners there are, the lower the rewards. This is not an interesting option for speculative investors; leave this to the millennials still living with their parents. Meanwhile, as miners proliferate and entire server farms are setting up to run the currency, the power suck is causing energy blackouts and total power consumption is exceeding that of more than 100 nations.