The value of the digital currency — or cryptocurrency — is up about 15 times this year.
If you were around during the frenzy of the late 1990s dot-com bubble, the bitcoin mania might have a familiar cast: a new technology that was misunderstood yet spawning hundreds of companies and resulting in speculative trading.
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Here’s a primer that might help demystify the new phenomenon for you investor types.
What is bitcoin?
It is an electronic form of currency that has no physical presence anywhere in the world. There are no physical “coins” like dimes, nickels and quarters. Bitcoins, like other cryptocurrencies, exist on the Internet.
“It is fundamentally a piece of computer code and software that verifies transactions,” said JR Lanis, an attorney with Drinker Biddle. “It can be any kind of transaction. It serves a purpose and derives its value by verifying transactions. That is the technology.”
Essentially, it is code that says, “this is what it is.”
Why has the price gone crazy?
This one is easy.
Limited supply. And, apparently, unlimited demand — at least for the moment.
People are buying up bitcoins, driving up the price of the 16.7 million coins in circulation to a total value of $265 billion as of midday Thursday. That’s not quite the size of Bank of America, but getting there.
Bitcoin has been a staggering investment. Is a crash coming?
“It’s speculative,” Lanis said. “People think that the price is going to continue to go up indefinitely.”
That would be a first. Even shares of Amazon.com (whose founder and chief executive, Jeffrey P. Bezos, owns The Washington Post) dropped like a stone after the dot-com bubble burst. Amazon has since surged to become one of the market’s big winners.
Unlike almost any stock or bond, the floor value of a bitcoin is zero. It does not pay interest. There is no asset value attached to it except what the market gives it. It has no central bank supporting it.
What it does have is a faithful following, which has its own value, just as gold has had for thousands of years. Bitcoins have value because a community believes in it.
“Bitcoin is really a fascinating example of how human beings create value and is not always rational,” former Federal Reserve chairman Alan Greenspan said during an interview on CNBC earlier this week. “It is not a rational currency in that case.”
How can I buy bitcoins?
Two ways. First, you can go on websites such as Coinbase or Gemini that trade digital currency and open an online account.
That’s what Leya Yusupov, a 37-year-old mother who lives in Queens, did.
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“I downloaded the Coinbase app, and created a password. Then I connected my account with my bank account,” said Yusupov, who bought her first shares in August. “You can also use a credit card, but you can buy more bitcoin if you have a bank account as your payment.” The Coinbase fee for her purchase was $48.47.
“In the beginning, they don’t let you buy a lot,” said Yusupov, who has a finance degree from St. John’s University. “As you buy more and have verification when you put in your ID, they see you buying more and boost your limit.”
She stores them in her “digital wallet,” which can be used with mobile payment systems.
But buying bitcoin is about to get much easier.
The Nasdaq Stock Market will start a bitcoin futures site on its commodities trading platform in 2018. The Chicago-based CME Group and the Chicago Board Options Exchange will begin trading bitcoin futures any day now.
“It will become easier once you start trading it as a commodity, like oil or gold,” Lanis said.
Can it be hard to buy bitcoins?
Yes. This isn’t like going on Charles Schwab, Scottrade or E-Trade and buying and selling stocks.
Not all the cryptocurrency trading sites, known as coin exchanges, are built for average folks like me.
“The platforms aren’t great,” Lanis said. “The sites you go on to buy it are fairly rudimentary. They aren’t set up like the stock market sites.”
David Drake, chairman of LDJ Capital, a family office, said that a money transferring license and other regulatory licenses are necessary to operate a business with cash transfers and escrow. Most bitcoin platforms don’t have that license.
What can I use it for?
Right now, storing value and speculating — mostly.
“People are seeing it much more as an investment than as a daily form of currency,” Lanis said.
Bitcoins can be used to buy merchandise anonymously, without a middleman and involving lower or no fees and no banks, but it’s not that widely used. It’s not easy when you have a “currency” whose value fluctuates wildly.
“There are a few places and vendors in the software business who accept it as payment more than anything else,” Lanis said. “Even some law firms. But it’s not that functional yet.”
Websites such as Coindesk.com and 99Bitcoins.com list businesses that accept bitcoin as payment.
How do you sell it?
Exchanges have a mechanism for you to sell your coins and get capital for them or a different cryptocurrency, Drake said. Those exchanges include Bittrex, Shapeshift, Bitfinex, Kraken and Yunbi.
Just like stocks or anything other investment, the risk is that you pay a high price and then the demand drops sharply and the value of your purchase goes down with it. You could be left with something that’s worth much less than you paid for it.
Should I invest in it?
“I wouldn’t,” said Daniel P. Wiener, chief executive of Adviser Investments, a Newton, Mass.-based firm that manages more than $5 billion in assets. “Bitcoin speculation in 2017 is equivalent to tech stocks in 2000 and real estate in 2007. All ended badly.”
“It’s speculative,” Wiener said. “I don’t really understand where the value is, and I always look askance at something that goes up 11 times in three weeks. It doesn’t manufacture anything. It doesn’t pay interest. I would not buy it. I would not recommend anyone buying it.”
Drake said he is personally invested in 50 different cryptocurrencies.
And “if you don’t mind a lot of risk, then it’s worth a flier,” Lanis said. “This is something that is extremely, extremely speculative. It’s not something I would bank my retirement on.”
That may be so, but Yusupov is a happy camper as of Thursday. Last summer, she invested in four bitcoins through a BitIRA retirement account. She also bought some coins for her personal account for just plain investing. She is up tens of thousands of dollars in each.
“In life, you need to take risks,” Yusupov said. “I want to see my money grow. I don’t want the cash to say there and erode. Bitcoin is going to go up. It’s the currency of the future.”
Jay Blaskey of BitIRA, not surprisingly, is bullish on the cryptocurrency’s prospects as a long-term holding.
“Technology moves in a given direction,” Blaskey said. “We are not going back to the horse and buggy, bitcoin is a solution built for the world we have, not the world we had.”