Have you heard of Bitcoin? How about cryptocurrency? If you haven't, don't worry, this is still pretty new stuff. If you have, it's probably been in the context of how you can profit from Bitcoin or how to find the next cryptocurrency.
Ignore The Headlines
I've been seeing too many headlines lately about how to get Bitcoin in your portfolio, how to profit from Bitcoin, or what Bitcoin's role should be in your portfolio. Then I saw this yesterday, "If you invested $1,000 in Bitcoin in 2010, you could now have a stash worth as much as $46 Million! It's not too late to find the next bitcoin though, thanks to a leading Bitcoin Expert's 3-step trading method."
You should notice how this author cherry-picked the time period and used a hypothetical example. This taps into your jealousy emotion - what if you would have gotten in? Then he taps into your greed emotion by telling you that you can find the "next" Bitcoin if you pay him some money.
Here is why you should ignore all these headlines.
What Is Bitcoin? Or Cryptocurrency For That Matter?
Bitcoin is a cryptocurrency. It literally means currency that is encrypted. It's digital currency, that is not backed by a government. Some of you may like that, other will hate it, but the point is not whether digital currencies are good or bad, but to make sure you understand how currencies operate before "buying" some bitcoin to try and capitalize on a trend.
If you have an account denominated in Bitcoin, then you have to spend your Bitcoin at places that accept Bitcoin. If you want to spend your Bitcoin at a place that only accepts dollars, then you have to exchange your Bitcoin for dollars.
What Is The Price Of A Currency?
The price of a currency is called its exchange rate. It's not like other assets that just have a price. Most assets (stocks, bonds, your house, your car, jewelry) have a price in one currency - most of you are most familiar with US Dollars - and the price can range from $0 to infinity.
Exchange rates are different. An exchange rate is the price of one currency in terms of another currency. Meaning, there is no "price" of a US Dollar. There is a US Dollar / Canadian Dollar exchange rate. There is a US Dollar / Mexican Peso exchange rate. There is also a Canadian Dollar / Mexican Peso exchange rate. All three of these exchange rates are competing with one another.
So when you hear people talking about Bitcoin's price, they are usually talking about the US Dollar / Bitcoin exchange rate. But it is very important to keep in mind that there is a British Pound / Bitcoin exchange rate, a Euro / Bitcoin exchange rate, a Japanese Yen / Bitcoin exchange rate, as well as many other Bitcoin exchange rates. On top of that, each of those currencies have exchange rates with all other currencies as well. The "price" of a currency, including Bitcoin, doesn't have the same range as other assets, because all of these "prices" are competing with one another in the web of currency exchange rates.
What Is Money?
Let's take a step back for a second and talk about money (I know...we're not supposed to talk about that in our society, right?). Money is a way to exchange goods and services or to keep track of how much something is worth. Almost all of us use one or more currencies as our money. But, some people use gold or silver as money. In prisons, cigarettes are often used as money (I don't know this..but I bet there's a dollar / cigarette exchange rate).
No matter what we are using as money, money in and of itself is completely worthless. You need to have someone else on the other side of your transaction who is will to accept your money. The same is true with Bitcoin. If you have Bitcoin, it's only worth something if someone else is willing to accept it - that means as payment for goods and services, or someone who is willing to give you dollars (or any other currency) for your Bitcoin.
Stay Off Bandwagons
If you took a look at the price of Bitcoin in dollars over time, you would see it pretty flat for a while, and then you would see it spike in 2017. I'm not for timing investments, but if there was any other investment that looked like this, you wouldn't go near it. It's baffling that people who think the US stock markets are "overvalued" don't think twice about buying Bitcoin.
Invest in a way that matches what you want your money to do for you, and in a way that's consistent with your values. I'm willing to bet that loading up on Bitcoin doesn't accomplish that. Invest, don't speculate.
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