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.
Disclosure: Long bitcoin (BTC).