Cryptocurrencies are, well, cryptic. That doesn’t mean they can’t make you money.
Bitcoin, the most prominent cryptocurrency on the global market, beat its previous all-time high price on March 4 and is valued slightly above $70,000 per bitcoin at the time of writing.
This new development has many people wondering, what even is a bitcoin or a cryptocurrency?
Cryptocurrencies are digital currencies with no physical equivalent.
Bitcoin is a cryptocurrency and exists on the blockchain. The blockchain is a system that verifies, validates, and records transactional data that cannot be altered, said Bina Ramamurthy, University at Buffalo’s Blockchain ThinkLab director.
“The blockchain is the infrastructure,” Ramamurthy said. “The blockchain creates trust in a trustless world.”
With some new exceptions, people can possess and trade cryptocurrencies through “wallets,” Ramamurthy said. These wallets are tools that people can use to access their cryptocurrencies independently, unlike a checking account which is held by a financial institution.
“The wallet is managed by you,” Ramamurthy said. “There is no bank between you and me to create trust.”
How do beginners invest in bitcoin?
Ramamurthy said there are three ways to invest, using third-party cryptocurrency exchanges like Coinbase, purchasing shares of a bitcoin exchange-traded fund, or ETF, or buying through a person’s own cryptocurrency wallet.
Investors do not need to buy bitcoin a singular unit at a time. People can buy and own percentages of a bitcoin. At $71,104.10 per bitcoin, a person could spend $100 and own about 0.0014064 of a bitcoin. It is possible to invest in bitcoin without having 70 grand burning in your pocket.
“This is not a scam,” Ramamurthy said. “There is strong underlying technology behind bitcoin.”
Why did bitcoin’s price skyrocket?
Ramamurthy said there are two major factors of why bitcoin’s price surged and beat its previous high of $64,400 per bitcoin: bitcoin’s increasing scarcity and the U.S. Securities and Exchange Commission’s Jan. 10 announcement surrounding bitcoin exchange-traded funds that created massive publicity among mainstream investors.
“The SEC approved financial institutions to create exchange-traded funds around bitcoin, causing the price to skyrocket,” Ramamurthy said.
An exchange-traded fund is a pool of financial securities, usually stocks of a certain industry or focus, that traders can buy and sell shares of on an exchange like the New York Stock Exchange. If that industry or focus is doing well financially, then the share price of the fund goes up.
These funds are generally perceived as safe and popular bets for investors, so bitcoin exchange-traded funds are making bitcoin available to everyone.
Ramamurthy said she foresees the bitcoin price will continue to rise and then stabilize at some point.
What do you need to know before investing in bitcoin?
“It is a frontier technology,” Ramamurthy said. “Any time you’re on the frontiers, you’ll see volatility.”
Because bitcoin is not governed by any central authority, it is highly subject to supply and demand. This means the highs are high, but the lows are very, very low. For example, bitcoin’s price in December 2017 was nearly $20,000. However, in December 2018, it had sunk to $3,400.
“There is a long road opened by bitcoin,” Ramamurthy said.