Bitcoin: What You Need to Know

Bitcoin, and digital currencies like it, are best known for two things: They’re really hard to understand and their value is all over the map. Just last week, the value of the cryptocurrency market dropped by $150 billion in 24 hours!¹

Even so, investors have been looking for ways to make money on Bitcoin since it was created in 2009. Businesses are jumping on the Bitcoin bandwagon too, with more than one-third of small- and medium-sized businesses accepting it as payment.² And it’s gaining popularity with bigger businesses like AT&T, Microsoft and Overstock. Even Wikipedia takes donations in bitcoin.³

So, is bitcoin just another get-rich-quick scheme or a legit investment worthy of your hard-earned cash? Let’s talk about it.

What Is Bitcoin?

Bitcoin is the most widely known type of cryptocurrency—aka digital money. There are no bills to print or coins to make. It’s all done over the internet using complex computing and coding. Like gold, bitcoins are worth what people are willing to pay or exchange for them.

There are currently over 2,000 other cryptocurrencies floating around the internet, and most play off of Bitcoin’s concept: anonymous and nationless digital cash. These include Ethereum, Ripple’s XRP, Litecoin, Tether and Bitcoin Cash (a totally different currency, despite its namesake).⁴ But none are as accepted as their prototype, Bitcoin.

How Does Bitcoin Work?

Bitcoin users exchange their digital “coins” for goods and services or trade them for cash. They pay electronically using a computer or mobile app, sort of like sending money via PayPal. Both bitcoin mining (don’t worry—we'll explain that later) and trading are handled anonymously, making the cryptocurrency scene prime for cybercrimes, like phishing and blackmail schemes.⁵ All that, combined with the fact Bitcoin is not regulated by any bank or tied to any country, makes for a scary combination.

So why is Bitcoin such a buzzword? In 2017, Bitcoin began building credibility when a large financial firm created a futures exchange for the currency.⁶ Let’s break down what that means: Futures exchange is fancy investment lingo for a central marketplace where you buy and sell futures contracts. Futures contracts obligate a buyer or seller to buy or sell a certain type and amount of an asset (like gold) at a certain price. Depending on what people are willing to pay for these assets, futures contracts help determine the value of the asset. The Bitcoin futures exchange allowed investors to participate in the rise and fall of its value without actually having to buy the currency.

In 2020, more investment companies began to embrace Bitcoin, and many large, household-name companies started to buy and hold bitcoins as assets, adding to Bitcoin’s credibility.⁷ And it looks like a bitcoin-associated exchange-traded fund could be approved this year.⁸

How Do You Buy Bitcoin?

If you are willing to take on the risk, you only need a digital currency account, like Coinbase, CEX.IO or Kraken to purchase a bitcoin. PayPal also allows its users to buy, hold and sell bitcoins. These accounts act as a digital wallet—just upload your information and money and you can buy bitcoins. The process is actually scarily easy.

How Do You Mine Bitcoin?

Mining is the only way new bitcoins are released. It’s super technical and complicated, but when you boil it all down, these anonymous miners are essentially validating a block (one megabyte) of bitcoin transactions—and they have to be the first to solve a numeric problem to get paid. A miner who’s lucky enough to jump through these hoops is paid 6.25 bitcoin per block ($100,000).⁹

Market chaos, inflation, your future—work with a pro to navigate this stuff.

This is a weird, not to mention uncertain, payment agreement —especially when you think about the vast brain and computing power it takes to mine bitcoins. We definitely don’t recommend it—even as a side gig.

The creator of Bitcoin limited the overall supply to 21 million, but the last bitcoin won’t be mined until sometime in 2140.¹⁰ 

How Much Is Bitcoin Worth?

Bitcoin is worth whatever buyers are willing to pay. Without a governing authority—like we have for nationally based currencies—or the correlation to earnings—like we have for stock prices—it’s really up to buyers. This is another huge risk that comes with the cryptocurrency world. The lack of a consistent pricing tool is one of the major reasons we see such huge swings in a bitcoin’s worth.

In July 2010, a bitcoin was only worth eight cents. Its value had ups and downs in those early years, but continued to trend up until it broke the $1,000 mark in November of 2013. It dropped off before rising to $1,000 again in early 2017. That’s when things started to get crazy. Bitcoin’s value reached $5,000 in October that year, then doubled to $10,000 in November. By mid-December its value was almost $20,000! The bubble finally burst, and the value dropped to about $3,500 by November 2018.¹¹

Then, in 2020, the bitcoin roller coaster started trending up again. Its value climbed more than 300% to an all-time high of just under $42,000 per bitcoin before the latest cryptocurrency crash.¹²

What Are The Risks of Bitcoin?

The biggest and most obvious risk of investing in bitcoin is its volatility. Sure, it sounds great to have your money grow by 300% in a year, but how will you feel when the bottom drops out? And based on the past performance and volatility it most likely will.

We want you to invest your money in something you can fully understand—something that has a track record—so you can see how it’s performed over the long-term. We are not interested in seeing money grow 300% in a year. We're interested in long-term compound growth that builds real wealth for your retirement dreams.

Bitcoin’s other big red flag? It’s downright mysterious! Bitcoin’s creator goes by the alias Satoshi Nakamoto. No one knows who he or she really is.¹³ All the transactions are anonymous, which is really shady. Plus, there’s no basis for a bitcoin’s value and it’s completely unregulated. That adds up to a lot of unnecessary risk—and we don’t want you to take unnecessary risks with your retirement or your future.

Here’s the truth: If you can’t explain an investment to a seventh grader, don’t put your money in it. Your family and your retirement are too important.

Should You Invest in Bitcoin?

In case you missed the point, we’ll say it again: Never risk your retirement on an investment that’s too complicated or unreasonably risky just because it’s the new, trendy thing to do. Build your wealth slow and steady by investing in mutual funds with a history of strong performance.

Now, if you’re investing at least 15% of your income for retirement, and you’re on track to meet your retirement goal, there’s room to talk about investing some of your money in other ways. After you talk to your investing professional about your mutual fund investments and get that all squared away, ask them about the best way to invest in your financial future. That way your retirement is secure, and you might choose to participate in other new ways to invest.

Our SmartVestor program is a free and easy way to connect with an experienced investing professional in your area who can answer all your questions about investing for retirement and, when you’re ready, investing for fun.

This article provides general guidelines about investing topics. Your situation may be unique. To discuss a plan for your situation, connect with a SmartVestor Pro. Ramsey Solutions is a paid, non-client promoter of participating Pros.