Bitcoin, the currency of regret. Where you can make money and still feel like a loser. In this post, I delve into my own experiences, do a bunch of research, and ultimately decide if I should invest in Bitcoin.
In November I sold half of my one bitcoin at about $6,000 per bitcoin. A crazy price! Well over 10x what I had paid for this obscure online currency. But despite making money I was still upset. If I had bought earlier or bought more I could have made a fortune and be set for life. Then, to make it worse, bitcoin continued shooting up and up and up. Within a few weeks it hit a high at just over $19,000. Over triple what I sold out for.
I first heard about bitcoin when they were worth less than $1 each. I was a student studying computer science and some of my course mates were getting interested in this technology. Not as a way to get rich, but because we were all nerds and the anarchist decentralised monetary system based on computer science really appealed.
I was in a great position to be an early adopter. Young, naive, tech-savvy, with lots of free time, and generally convinced that our current system is broken. Plus I had plenty of cash from having discovered matched betting a few months earlier. But I failed at the first hurdle. I tried to buy some bitcoin and at that time the only way to do it was to do a bank transfer to some random person and hope they sent you some bitcoin. I nopped right out.
A few years later in 2013 when bitcoin was making news headlines I did, in fact, buy one bitcoin for about $500.
Which has led me to a very strange place now. Although at every point I made completely rational decisions and have made a profit from Bitcoin, I am filled with regret. Why did I not buy a few thousand bitcoins when they were worth under $1 each? I’d be a multi-millionaire now! Why did I only buy one in 2013? Why did I sell out at $6,000 and not wait till $19,000? While writing this article I contacted some of my old course mates to see what they did with their bitcoin. All of them had similar stories. Either they sold too soon or didn’t buy enough. Some people made a few thousand pounds. Noone made a fortune.
But my journey and Bitcoins journey isn’t over. I still own half a bitcoin, now I need to decide what to do with it. Should I re-buy into bitcoin? Should I sell out completely? Should I just hold on (hodl) and wait? Or should I diversify into other cryptocurrencies?
To decide I have gone deep into cryptocurrency. Doing hundreds of hours of research and talking to lots of experts. This post is me clarifying my thoughts.
What is Bitcoin?
Bitcoin can be pretty complicated to get your head around. But that is because the precise mechanics of how it works complicated, whereas the principles are actually fairly simple. So let’s take a step back and here is my real simple way I try to think about it.
Bitcoin is an online currency that is not controlled by anyone. Anyone can create a wallet for themselves that is ‘encrypted’ using a secret passphrase. The only person who can send bitcoin out of this wallet is the person with the secret passphrase.
All around the world, there are computerised bookkeepers who record every transaction that happens between any of these wallets. Whenever someone transfers some bitcoin to someone else, they tell these bookkeepers who then add it to an ever-growing list of transactions. Because they are simply recording transactions it doesn’t matter how big the transaction is. It takes about the same amount of work to record a 10,000 bitcoin transaction as a 0.00001 bitcoin transaction.
Every ten minutes or so the bookkeepers collect all the recent transactions and turn them into a mathematical puzzle. They then race to solve the puzzle. The first one to solve it ‘wins’ and that block of transactions is sealed and is added to all the bookkeeper’s books. Where it sits forever and cannot be changed.
Every bookkeeper is recording the same blocks. So if there is ever a disagreement or one bookkeeper goes offline you can just look at what all the other bookkeepers have recorded.
These bookkeepers are known as ‘miners’ and anyone can become one. They are rewarded for recording all this data by being given a portion of the transaction fee that everyone pays and by being rewarded a share of any new bitcoin generated.
To see how many bitcoins I have in my wallet we can just query the bookkeepers and see the complete transaction history. To send a bitcoin to someone else I tell the bookkeepers how many I am sending, what the address of the new wallet is and how much I am willing to pay for the transaction to be recorded, all confirmed by my secret passphrase. If I offer a low amount then it could take a long time to get recorded and confirmed, if I offer a lot it will be much quicker.
And that’s pretty much it. As I said the mechanics is more complicated, and that mathematical puzzle is pretty important in stopping bad actors, but we don’t need to go into how exactly it works, just what the implications are.
How Do Bitcoins Differ From Normal Currency?
In my opinion, there are four main differences between Bitcoins and normal currency:
- Every transaction is recorded by every bookkeeper. Unlike your bank account which is just recorded by your bank.
- There are only ever going to be 21 million bitcoins. No more can be created. The government or central bank of a country cannot create any more.
- The only person who has access to your bitcoin wallet is you. If you lose your keyphrase or it gets stolen, those bitcoins are gone for good. No bank has access to it.
- It is global. So there is no difference between a wallet owned by someone in UK or someone in China.
Theoretically, you can use bitcoins for anything you currently use your online banking for. That includes credit/debit cards, online transfers, paying your bills, etc. But that is only in theory. Currently, it is very difficult to do anything with bitcoins except hold them.
Let’s look into each of those and see their pros and cons.
1. Every Transaction Is Recorded By Every Miner
This is a pretty integral part of the bitcoin network. It means that no one person or group of individuals has control over the network. Provided 51% of the miners don’t collude to cheat, then the system is safe. So the more miners there are verifying and recording transactions, the safer.
But there are some pretty obvious problems. As every miner records the entire history of every transaction, that history is just going to get longer and longer. It is currently about 155 Gigabytes, which each miner needs to keep. And it is just going to grow.
To keep the size of the blockchain (the official name of the ledger) small. There is a limit on how many bytes get added each day. There is a new block of 1 MB added every 10 minutes. Which means that there are only about 2,000 transactions recorded every ten minutes. Nowhere near enough for a global currency.
That means there is currently a big queue of transactions waiting to be confirmed. And to get to the front of the queue you need to pay. At the time of writing, you need to offer a transaction fee of around $19 for your transaction to have a chance of being included in the next 3 blocks.
That leads to the other obvious downside. The transactions need to be confirmed and added to a block for it to be real.
So if you want to pay for your coffee in bitcoins, not only will you need to stump up a transaction fee of $19, but you will also need to wait about 30 minutes for your transaction has been confirmed.
That sounds rubbish and you’d think it would be the end of Bitcoin. But you need to remember that Bitcoin is a developing technology and there are some really smart people working to solve these problems. One that sounds pretty promising is called the lightning network, you can read about here.
2. Only 21 Million Bitcoins In Total
We’ve already mentioned that miners get rewarded with new bitcoins for completing blocks. Well, there is an inbuilt maximum number of bitcoins hardcoded into bitcoin. That number is around 21 million.
The advantages of this is that it makes bitcoin a scarce resource, like gold. There is a limited supply. This makes it a deflationary currency. Which in layman terms means that it will go up in value over time (provided it remains as popular). The number of eggs you can buy for 1 bitcoin should increase over the years.
Economists will argue over whether this is a good thing or not. I think there are good arguments on both sides. But one thing for sure is thatBitcoincoin became the predominant currency it would remove quantitive easing (printing new money) from the government’s arsenal. Currently, if our government takes on too much debt and can’t pay it off, or needs to bail out a struggling bank, they can just print new money to do it. Not so with a decentralised deflationary currency. I think it is unlikely that our government will allow a currency they have not control of to take over.
I personally think that stopping governments from printing new money is a good thing. But a lot of people disagree.
The limited nature gives us an idea of how high Bitcoin’s price can possibly go. We can compare the value of all bitcoins to the value of all gold or all US dollars in bank accounts or in notes and coins.
- Bitcoin is worth about $250 billion.
- There is currently about 13,844 billion US Dollars in circulation.
- All the gold in the world is worth about $8,000 billion.
For Bitcoin to take over the role of the US dollar as the world’s predominant currency it would need to worth about $800,000 a bitcoin in today’s money. For Bitcoin to be worth the same as gold it would need to be priced about $470,000 a bitcoin. I can imagine that with some improvements bitcoin being worth somewhere between those two.
3. Only The Person With The Passcode Has Access To Your Wallet
If you lose access to your online banking you can just pop into the branch with your passport and get access to your funds. Or if your account gets hacked they will change your password and refund you your losses. Here in the UK our security goes even further. Your personal savings in a registered bank are also covered by a government guarantee. If a bank fails the government will cover your losses up to £85,000.
But with Bitcoin, if you lose access to your account that’s it! You will likely never get it back. Google is full of stories of people who lost or threw away hard drives full of bitcoins now worth a fortune. Like this man whose lost bitcoins are worth about $80 million.
It’s unlikely people will be losing wallets with that amount of money in again, but I do expect it will be pretty common for people to misplace their passcodes and lose access for good.
There are some solutions to this. One is to be really on top of your wallet management and take backups. Or even use something like a hardware wallet (KeepKey, Ledger Nano S, and Trezor are the most popular).
Another option is to have a company manage your account for you (I’ll get a lot of abuse for saying this as it goes against a lot of what people believe the point of bitcoin is). Some companies offer online wallets and with varying levels of control. Some act similar to a Paypal account. Where you have the added assurance that they can get access to your account if you lose your details. But you are at risk of losing your bitcoins if the company fails or steals from you. That is not that unlikely. MTGox was the worlds largest bitcoin intermediary and exchange, until in 2014 it announced that 850,000 bitcoins belonging to customers and the company were missing, worth more than $450 million at the time.
We will talk later about what options there are and how to create a bitcoin wallet.
4. It Is Global
Bitcoin wallets are anonymous and reliant on nothing to set up but an internet connection. When you transfer money, every wallet is treated the same. The destination wallet could be owned by a five-year-old in Venezuela or a huge corporation in the UK. It doesn’t matter. The fee is the same.
And there are no identifying marks on a wallet. They are anonymous. Every transaction it has ever made is recorded on the blockchain, but the owner is not.
This is great if you don’t trust your government (in some countries that is very wise), want to avoid tax, or transfer money to someone in another country. But it is an absolute nightmare for a government to regulate and control.
And that is one of the reasons why a lot of people think that the government will never allow Bitcoin to become a proper currency. It will become almost impossible for them to catch tax evaders or money launderers.
What About Other Cryptocurrencies?
Now that we know how Bitcoin works it is worth me very quickly mentioning that bitcoin is not the only cryptocurrency out there. In fact there are hundreds. The blockchain technology that bitcoin is based on is free for anyone to copy and create their own currency. On top of that, a lot of very smart people are making improvements or changes to the underlying technologies to create currencies they believe will be better than Bitcoin.
Bitcoin is still the largest cryptocurrency, but not by a lot. It is worth only about 1/3rd of all cryptocurrency. The chart below is made from coinmarketcap.com. Market cap means the value of all of the currency, for instance the price of every bitcoin added together.
If I do invest in Bitcoin, I will be betting that it is the currency that will win.
Practicalities. How Do You Invest In Bitcoin?
So after all that, how exactly do you go about investing in Bitcoin? Well I suggest you do some of your own research first and
The short answer is:
- Find a Bitcoin exchange and create an account
- Buy some bitcoins
- Move your new bitcoins to a secure wallet
The biggest exchange is Coinbase (you can use my refer-a-friend link and we’ll both get $10 each). They are the biggest and most regulated. So if you are just planning on investing they are great. But if you are planning on buying drugs or funding terrorists choose a different exchange as they’ll probably tell you off or close your account.
Unlike when I first bought my bitcoins, you can now just buy some bitcoins on Coinbase using your credit or debit card. It is very easy.
Once the transaction is confirmed your bitcoin will be added to your Coinbase account. Now as we mentioned above this isn’t a true bitcoin wallet as you don’t have access to the private keys. If you want complete control you need to set up your own one. There are lots of choices out there, here is a good guide.
Conclusion: Am I Going To Invest In Bitcoin?
Some people will get very rich off cryptocurrency. Most will lose money.
I heard that quote somewhere and it really struck me. There are hundreds of cryptocurrencies popping up and everyone seems to be talking about making a fortune in crypto. I even heard my barber talking about taking out a loan to by some Bitcoin. This makes me very nervous.
Joe Kennedy (JFK’s dad) famously exited the stock market just before the great depression after his shoeshine boy gave him stock tips. He figured that when the shoeshine boys have tips, the market is too popular for its own good.
Is cryptocurrency a bubble? Almost certainly yes. Will one of the currencies breakthrough and become a legitimate currency? I think so. Do I have enough confidence in myself to pick the winner? No.
The other issue I have with investing in bitcoin is that it isn’t really investing. The only way I will make money out of Bitcoin is if it goes up in value. I much prefer investments that generate income and actually add value to the world. It’s the same reason why I don’t invest in commodities like gold. I don’t really believe in buying something just for it sit there waiting to be sold in the future. You can read my posts on my peer-to-peer lending strategy or my stock investing strategy.
So after all that here is my bitcoin investing strategy.
- I will diversify and buy into a few other cryptocurrencies. I have bought some Ethereum and Litecoin. I also have 1 Bitcoin Cash which everyone who owned bitcoin before August has.
- I will keep my 0.5 bitcoin.
- Then I will sell half of my holdings each year until one becomes a viable currency, or they become worthless. Each year I will rebalance and move some of the profits into up-and-coming currencies.
Not the most confident investment strategy but one that I believe hedges me from regret. Even if prices go to zero I will have made money out of crypto. And if we do see a $500,000 valuation of bitcoin (or one of the other currencies), I will still have done well and won’t hate myself for missing out on the modern day gold rush.
Sorry for such a text heavy post. I have spent quite a lot of time researching Bitcoin and other cryptocurrencies and find them very interesting and wanted to do it justice. What do you think? Any Bitcoin experts out there disagree with my conclusions? I’m up for a good chat about Bitcoin!