Bitcoin for Everyone

Lesson 4 – Investing in Bitcoin

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Welcome back to Bitcoin for Everyone, Coin Academy original course, designed to introduce you to the world’s most popular alternative currency, Bitcoin. This course is divided into a set of lessons, there are 8 lessons, we are on lesson number four right now, Investing in Bitcoin, a topic we’re asked about frequently.

Now there are multiple ways you can use Bitcoin as an investment vehicle. By way of an overview let’s run through the options. First, since Bitcoin is deflationary you can use as an instrument of stored value. Second, Bitcoin does offer opportunities for arbitrage. Third, you can also use Bitcoin in an intermediary role in Forex transactions. Next, you can look for investment opportunities in the Bitcoin ecosystem, and finally if you’ve the stomach for it you can invest in mining. We’re gonna look at each of these in turn. But before we do that lets look at the big picture.

This chart shows you Bitcoin pricing across the last 15 months. That’s the big line in the middle; the line across the bottom shows us volume on each of those individual days. Lets put in some markers here to make this a little more intelligible. There’s 2014, there’s the low during this 15-month period, $63 in July of 2013. The high of December 2013 a little over $1100. We had a secondary peak after then it sort of levelled off a bit now as we film this video we are here at $507, its volatile to say the least. I would also point out that transaction volumes are quite significant as we said in the previous lesson, daily transaction at this point do frequently top over 30 million US Dollars in a 24 hour period, and during the peak period in December we saw transaction values in excess of 70 million US Dollars within 24 hours and that occurred several times during that period. So that’s quite a bit of a change in hands and that opens up significant opportunities.

Lets look through the different ways that you can use Bitcoin as an investment vehicle. First you can take a traditional buy and hold strategy. Since Bitcoin is deflationary you can use it as in instrument of stored value. Here we have a commodity of limited supply of which there is significant demand and significant volume and the velocity of these trades means we do have a currency that is increasing in value although as we saw on that last chart it isn’t a straight line.

Now buy and hold is a very common strategy in the Bitcoin market today. There are a number of people who are doing this in fact you will hear people say the Bitcoin price today is irrelevant because they are so confident that the value is going to be significantly higher in the near future. This does carry risk, but the track record to date is tempting for many people and it does lure many people into the buy and hold strategy.

Another opportunity for investment in Bitcoin is through Arbitrage. As we saw in that chart Bitcoin does fluctuate, and it does fluctuate more radically then more currencies, at least most major currencies. This does provide you with numerous opportunities to buy and sell for a profit.

Additionally, there are variances between the exchanges that can add percentage points. This occurs because the lower volume exchanges have depressed selling prices so you can purchase Bitcoin on those exchanges assuming things are even available, and then you can turn around and you can sell them on other exchanges at higher prices. It gives you a way that you can leverage this a bit.

Now you can also use Bitcoin as in intermediary currency this isn’t so much an investment strategy, its more as an enabling tool In the past the US Dollar or the Euro has often served as intermediary currency in exotic currency exchanges. But there’s no reason that Bitcoin can’t fulfill that role. You go from currency A, you buy Bitcoin on one exchange. You take your Bitcoin and on another exchange you buy currency B. As we pointed out in the previous lesson it does have lower transaction costs than the traditional method but again you are at the mercy of Bitcoin price fluctuation.

Another alternative is to invest in the Bitcoin ecosystem. As someone once said, don’t dig for gold, rather, sell the people digging for gold shovels. Simply there are many opportunities to invest in companies that are seeking to build businesses that leverage Bitcoin and related technologies. This is a long-term play and it’s for those with domain knowledge, but there is a large about of venture capital going into this area right now. There are quite a few plays on the table there are quite a few people looking for money. If you have the technology knowledge, if you have the currency knowledge and you have the stomach for venture capital, go be an angel investor.

Finally, you can consider investing in Bitcoin mining. Now, you can either engage directly in mining in which case your investment is in hardware and operating expense, and then you wait until you gather a return from operating that hardware and running the Bitcoin software, you’ll be verifying transactions and adding to the blockchain basically. Or you can join a mining guild, which basically means you join forces with other miners to try to leverage your group computing power. But again the investments the same, its in hardware and operating expense. The more computing cycles you’re able to contribute to the guild the greater your share of the return, this is how it works.

You can also buy a mining contract, which means you rent time on a machine engaged in mining. In this case the expense is simply the rental contract there’s no hardware, there’s no operating expense, somebody else does that.

Now all of these options are not for the faint of heart. The low-hanging fruit in Bitcoin mining is gone. There are big conglomerates engaged in this now, there are extremely large and powerful mining guilds; this is a difficult play to put it simply.

Now we are not investment advisers. We want to make that clear right now, and this lesson is not about how you can go out and make money with Bitcoin. Its simply helping you understand what the opportunities are in the market and the different avenues are being used. So we do need to provide some sort of disclaimer and here it is:

While there are multiple opportunities, there are significant risks. And for those who are unschooled in technical aspects of Bitcoin, or unschooled in investing in currency, the risks are compounded even further. So please do not be seduced by the charts. I know they look dramatic, but seek professional advise before you commit your money to any investment, much less something that is new and unknown to you.

That’s it for this lesson; join us for Lesson Five when we dive deep into the Risks of Bitcoin.