Bitcoin is a form of digital currency that has been a hot topic for debate recently. Is it safe to invest? How do you spend it? How do you know how many you have, and how does it make sense to spend a fraction of a coin on a purchase? These questions are natural first timer questions, and some of the terminologies are complex, but Bitcoin itself is actually quite simple.
Bitcoin really hit people’s radar when the Winklevoss twins formed an ETF around the currency. The process of establishing an ETF is very complicated, and many had been proposed but this was the first to be accepted. ETFs are generally accepted as fairly stable investments, so the Bitcoin market suddenly opened up to the average person who naturally wants to know more about this currency.
Plus, it doesn't hurt that there are quite a few Bitcoin millionaires out there now.
So, let’s begin with a rundown of Bitcoin before diving into its legality and the nuts and bolts. If you're looking for a quick and easy way to get started, check out Coinbase. It's an exchange and app that allows you to buy, sell, and store your Bitcoins. We love it because you can get $5 when you buy $100 in Bitcoin.
What Is Bitcoin?
There is no actual “coin” for Bitcoin, although some startups are playing with the idea of physical devices to store your coins. Bitcoin is a digital currency with no centralized control. That means no government can regulate it, and it also means there must be a universal system in place to track transactions made with it.
That system is the block-chain, which stores the details of each transaction in a very large ledger. Those with a Bitcoin address have a public entry on that ledger identifying how many coins are owned, but there is not much personally identifiable information attached to those coins.
For some, that’s very reassuring. It means that there is no authority to control your money, and you can buy bitcoins in a matter of minutes as opposed to opening a bank account (which may take an hour in person and several days to process).
Side Note: While governments can't regulate Bitcoin directly, they certainly have a lot of power to regulate it indirectly. For example, the United States could make it illegal for any company to transact in Bitcoin. This could seriously undermine the concept of it.
How To Buy Bitcoins
Bitcoin isn’t a physical tender, so it’s not something you can exchange easily. If you try to buy Bitcoins with a credit card, or with your PayPal account, you could easily get scammed by unscrupulous sellers. However, if you stick with known and regulated apps and exchanges, you should be fine. We have a list of the most popular cryptocurrency exchanges here.
One might pursue mining, but that’s a semi-expensive endeavor that appeals to very technologically inclined individuals. For lay people, a better method is to buy from a Bitcoin exchange or invest in a fund. This way, you’re also not as tied to the price of Bitcoins at any given moment. You can hold your investment in relative security, choosing when to sell.
Interested? Get a free wallet and try the technology out for yourself. You can buy a “satoshi”, or a very small fraction of a bitcoin, to see what it’s all about.
The Legality Of Bitcoins
You’ve probably heard that Bitcoin is used in illegal transactions, and the name “cryptocurrency” can be easily twisted. So, is Bitcoin actually legal?
Governments would be able to see what the bitcoin address did with a given bitcoin, but it would be difficult to tie that alias to an individual. As a result, some are skeptical about the use of bitcoins because of the potential implications for abuse.
It's important to remember that Bitcoin is a public blockchain. So all transactions that have ever happened are public. However, the transactions are done with an address, and it could be near impossible to associate that address with a person. The IRS and US Government is trying though - and it has subpoenaed records from many exchanges to track down individuals and companies that may be skirting the law.
Without acquiring a law degree, the short answer is that simply buying and trading bitcoins is legal. Concerns come into play when you decide to take your operations deeper into mining for coins or running an exchange.
If you’re concerned about legality because you want to dip your feet into the cryptocurrency water, rest assured that simple investing is legal and encouraged. That said, investing in Bitcoin is the definition of due diligence. You should continue to study up on this new form of money.
The Future Of Bitcoin
The future of Bitcoin is uncertain. On one hand, you have people that claim Bitcoin is the future of money. There is no doubt in my mind that the underlying blockchain technology will change our economy and world as we know it. It will be the driving force of many innovations of the future.
However, does that make Bitcoin valuable? That's to be seen.
On the other hand, you have people that say Bitcoin is a worthless ponzi or "pump and dump" scheme. As a result, you should avoid it altogether.
Which is right? We don't know, but there are compelling arguments in both directions.
Do you invest in Bitcoin?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.