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| Bitcoin has survived many challenges but investors continue to lose money in it. |
When I wrote about the possible failure of Bitcoin early last year a lot of changes were still in the queue. I think I was correct to be a little anxious. Without some words of caution investors won't pay attention to what is happening behind the scenes in the Bitcoin world. For example, we finally experienced that fork which led to the creation of Bitcoin Cash. And for some Bitcoin holders it was like money magically appeared in their hands because they got to keep their Bitcoin as well as start out with Bitcoin Cash. Another fork is planned for November. I wonder if it will go the same way.
There are still some problems in the world of Bitcoin. I have a couple of friends who receive Bitcoin for their business every month. They complain that they are always paid after the Bitcoin prices start to drop. So the pattern seems to be that Bitcoin begins to rise in value around the beginning of the month and it drops in value around the middle of the month. It sounds like people convert their cash into Bitcoin after the 1st of the month so they can make payments in Bitcoin, and then people who receive Bitcoin payments have to sell out after the 15th. That's hardly fair!
Instead of focusing on the negative, let's take a look at the positive aspects of investing Bitcoin. First, I think most people now understand how blockchain works. If not, here is a great introduction to how digital currencies work. The short version is that digital currencies rely on a consensus among "miners" who compute complicated hash values to encode transactions into blockchains. The blockchains are copied over and over again and every transaction has to be verified by several miners before it is added to the blockchains.
Once you get your head around the concept of the blockchain it sounds very safe and secure. In fact, I have read that a lot of banks are adopting blockchain technology because it is so sensibly safe and secure. They can create their own digital transaction logs that are encrypted and verified. Whatever you may think of Bitcoin and its imitators, blockchain technology is probably here to stay until someone invents something more secure. The only real drawback to blockchain technology is that as more blocks are added to the chain it takes longer to verify the addition of new blocks.
Another drawback to using Bitcoin for Americans is that it's still a poorly regulated medium of exchange. Although banks love the technology behind Bitcoin they are afraid to accept it because it has been used for illegal activity. You'll have to research where you can buy and sell Bitcoin in the USA. As I write this I only know of two marketplaces that accept American depositors: Coinbase and Kraken. I have heard there is one in Hong Kong, too, but people are warning Americans away from it. I'm not sure why.
To be sure, there are people calling for government regulation of Bitcoin. It would make a lot of sense to do this. I don't think they can regulate how Bitcoin is mined and transactions are encoded, but they can regulate who accepts Bitcoin and how Bitcoin value is converted into hard currencies. Without that kind of regulation you'll never be able to deposit Bitcoin in your bank account. Once the banks decide it's safe to use Bitcoin everyone will be able to use it.
And don't think that the legality of Bitcoin is all that obscure. In September 2016 a US federal judge ruled that Bitcoin is indeed money. It's just not legal tender in the United States. What that means is that we cannot legally buy and sell securities with Bitcoin, and your Bitcoin won't be protected by insurance programs like the FDIC and FSIC. Until the US government figures out how to regulate the use of digital currencies they will remain a very safe haven for illegal transactions. That is the whole problem with digital currencies right now. Criminals and terrorist organizations love them.
If you are still not sure about whether to invest in digital currencies, don't take my word for it. I'm kind of ambivalent. A lot of people are. You can read some pros and cons in this article. The bottom line is that investing in digital currencies is a very personal decision, and it entails some risk. I think we'll eventually see some laws that make it easier and safer for people to invest in Bitcoin and other digital currencies. Until that time, remember only to risk money you don't need.
