Bitcoin

Bitcoin, the cryptocurrency that has frequently been in the news over the past year, made some very negative headlines last week when one of the major bitcoin exchanges (based in Japan) filed for bankruptcy. With this recent increased uncertainty, the average exchange rate between bitcoin and the US dollar (USD) dropped below $500 (I use exchange rate and not value because many people believe that since bitcoin is not backed by anything or any government, it does not have any value). I have read about bitcoin periodically over the past year and know the basic idea about how it is created, but I admittedly have an incredibly novice understanding of the math, algorithms, and technology behind bitcoin and how it actually functions. However, with the recent USD exchange rate below $500, I decided that I would buy a small amount of bitcoin and see how it does. To do this, I created a bitcoin wallet and purchased bitcoin using Coinbase, the San Francisco, California-based bitcoin exchange which has American venture capital backing, when the USD exchange rate was approximately $484 per one bitcoin. Coinbase enabled me to buy bitcoin directly with cash from my bank account for a fee of 1% of the total purchase price of the transaction (which was a very reasonable “commission” for the small amount of bitcoin that I purchased). You can even buy small fractions of bitcoin if you don’t want to buy an entire bitcoin.

Many people may see this as pure speculation and not even trading, let alone investing, especially since my knowledge of the entity that I am buying is limited. However, although my knowledge of bitcoin is not extensive, I do feel that I am familiar with the high volatility with which bitcoin trades (due to my experience with buying out-of-the-money options) and am comfortable with and understand this volatility. Bitcoin has continued to trade in a volatile manner over the past few days, and, for the time being, the USD exchange rate for my bitcoin is higher than when I bought it.

Here is the USD exchange rate for bitcoin changing in real-time:

You can also see a neat map display of bitcoin transactions taking place worldwide in real-time here.

Of course, I am also aware that the USD exchange rate for my small amount of bitcoin could go to zero at any time or the exchange could become insolvent which is why I only bought a small amount of bitcoin. Yes, it is a highly risky purchase, but the risk is defined and limited to the total amount that I paid to buy the bitcoin. In addition, since Scott and I are always interested in learning about new ways to invest our money, it provides us with another opportunity to learn more about finance and markets in general while having some actual defined risk in play (which we find of value). Overall, it will be interesting to see what role, if any, bitcoin and other cryptocurrencies (of which there are many) and new payment/exchange systems (such as Ripple [see the video below], which is backed by Google Ventures among others) end up having in finance over the years ahead.


(Source: http://youtu.be/9zxA3Gt7y3c)

Disclosure: Long bitcoin (BTC).

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6 Responses

  1. scott says:

    Wow! You’re up nearly $200 already (29%). Did you enter the investment with a profit target that you’ll get out at?

    • johnny says:

      Thanks, Scott. I entered my bitcoin position with the idea that I would aim to hold my core position more long term. I may periodically trade bitcoin short-term around that core position, but I want to have a constant core position over the coming months (and likely the next few years) because if (which I admit is still a very big “if” at this point) bitcoin is embraced and accepted more widely at some point in the future, I feel that it has the potential to increase in value even further.

  2. Scott says:

    Wow. Bitcoin really fluctuates! Had been up by $200 and now down by $40. Either way, I really wish I had gotten into creating Bitcoins a few years ago.

    • johnny says:

      Great point, Scott. Bitcoin has been very volatile lately, even briefly dropping below $400 at the end of last week. I missed buying more bitcoin in the sub-$400 range, but I was able to add to my position at ~$424. I actually feel that the relative (at least in my opinion) resilience that bitcoin has shown recently despite the significant opposition it has encountered makes it an even more attractive long-term investment in my portfolio.

  3. Great article Johnny. I think the benefits of trading bitcoins are obvious and It is interesting to see how people approach it.
    Kate Gallagher recently posted…June 14, 2014: Bitcoin Market Consolidation Keeps Bull Market HealthyMy Profile

  4. Jack Ogden says:

    Great article Erin. Bitcoin is definitely a great new use of technology and I think it will only keep growing as time goes on.

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