By Tama Churchouse
I’ve been pounding the table on bitcoin for a while. I believe everyone should have at least some exposure to this asset class. Cryptocurrencies like bitcoin – and the technology behind bitcoin – will ultimately change the world.
The mainstream media have started picking up on the phenomenon. In turn, Bitcoin has been making its way into conversations between families and friends at parties around the world.
Yet, a lot of people still don’t understand how bitcoin works. Quite frankly, even if they do, they are still on the sidelines, because they do not want to put in the hard work to buy.
That means they are missing out on a once-in-a-lifetime opportunity. Don’t be one of them.
Here’s what you should know to get started today:
Bitcoin is simply a cryptographically secure medium of exchanging value. It’s not a form of “fraud” or a “vehicle for criminals.” Even though bitcoin is becoming more mainstream, I still see countless articles claiming that it isn’t real or that it will “close.”
At the core of bitcoin technology is a kind of super distributed ledger called the “blockchain.” The blockchain is public and accessible to anyone, just like the Internet.
Bitcoin can be moved around. It can be used to buy goods and services, and it’s limited. Only 21 million bitcoin will ever be mined. More than 16 million have already been mined.
As an asset class, I would categorize bitcoin as similar to U.S. dollars, British sterling, Japanese yen, or any other currency. Plain and simple, it’s a form of currency. As such, it should be looked at as something between, say, U.S. dollars and gold.
It’s important to remember that bitcoin isn’t controlled by any central organization – the Federal Reserve, the U.S. Treasury Department, the Bank of England, the European Central Bank, or anyone else. Plus, there’s no company, no CEO, and no chief financial officer.
So it can’t be “closed.” The importance of cryptocurrencies will grow over time simply because they aren’t controlled by governments and no one entity is calling all the shots.
Still, you might think you’ve missed the boat because it’s becoming more mainstream.
In the past, people have always loved to talk about property prices and airline travel at dinner parties that I’ve attended in Hong Kong and around the world. I’ve noticed recently that bitcoin and cryptocurrencies are now becoming part of those conversations.
But even people who know what they’re talking about financially and have been in the investment world for several years aren’t completely sure what these cryptocurrencies are.
So even though it’s entering our everyday lives, not many people actually own bitcoin.
That’s likely because buying bitcoin is still relatively cumbersome.
Exchanges need to do “know your customer” checks. Depending where you live, funding a bitcoin account could require a trip to the bank and an expensive bank transfer. Plus, you still need to become familiar with an entirely new asset class. That takes a lot of effort.
But all that means is the opportunity is still there.
Now, I’m not saying bitcoin won’t be volatile.
Like any asset, cryptocurrencies will continue to see rallies and corrections. Don’t fall into the trap of thinking “this time is different” and that bitcoin will go up forever. It could be in for a short-term price bubble. But over the long term, bitcoin’s upside is far from over.
In short, I believe everyone should add some cryptocurrencies to their overall portfolio.
The most appropriate course of action for most investors is simply to buy a small amount of bitcoin – and forget about it. Don’t overreach and buy more than you can afford to lose. You certainly shouldn’t borrow to buy bitcoin.
Just buy a little bit today, hold on to it, and ignore the short-term volatility. Participate financially, not emotionally. It’s not a one-way ride, and it’s a bumpy one.
Be prepared to stomach big declines and sit tight. As always, “invest” no more than you can absolutely afford to lose. I’m talking about using as much as you’d perhaps invest in a single speculative small-cap stock in your equity portfolio.
Bitcoin is an asymmetric bet.
If it falls – or even goes to zero – your loss will be small and insignificant, assuming you’ve put in only what you can afford to lose. But if it continues to go up over the next few years, then gains of 10 to 20 times are possible. No other asset offers this potential upside today.
So don’t delay. Become familiar with the process of buying, trading, and storing cryptocurrencies immediately.
They’re here to stay. Being on the outside (and not understanding them) will limit your ability to profit from them.