Disclosure: As of this writing, I personally own bitcoin (BTC), Ether (ETH) and Litecoin (LTC) and may invest in other cryptocurrencies in the future.
If you have not invested in bitcoin, you’re most likely getting the itch as the value of a bitcoin races towards $10,000. Bitcoin and cryptocurrency must have been the topic of conversation at Thanksgiving as investors raced out and opened 100,000 new accounts on Coinbase over the weekend. If you are one of the new Coinbase accountholders or are considering opening an account, please do not rush out to invest in bitcoin, or other cryptocurrencies if you cannot answer the following:
- Who is credited with being the creator of Bitcoin?
- What is the relationship between bitcoin and blockchain?
- What are three potential uses for blockchain in the future?
- How do you invest in bitcoins and other cryptocurrencies?
- What are the options for storing your cryptocurrency?
- What happens if you lose your cryptocurrency?
- How many bitcoins can there be?
- What is a fork? (I’ll give you a hint: it’s not a utensil)
In addition to holding off on investing in cryptocurrency before being able to answer the questions above, please do not rush out to invest in Bitcoin, or other cryptocurrencies if you have not done the following:
- Read Satoshi Nakamoto’s whitepaper, Bitcoin: A Peer-to-Peer Electronic Cash System.
- Written out why you are investing in Bitcoin or other cryptocurrencies.
- Determined an amount of money you can “afford” to lose, should this experiment blow up.
- Determined your method of storage and understanding limitations of the storage–they all have limitations.
- Re-evaluated your tolerance for risk. This is tricky because your “tolerance” for risk changes with the environment. Investors are probably more tolerant of risk today than they were in 2008. Think back to 2008: how did you feel and what actions did you take/not take?
I’m excited about the future of Bitcoin, Blockchain, and cryptocurrencies, but I’m afraid many investors are wading into deep waters with no understanding of the underlying currents. While completing these prerequisites will not guarantee success investing in bitcoin and cryptocurrencies, it will help you gain a better understanding of a new, complicated and exciting technology. In all honesty, these questions and tasks are very basic, but many investors do not know the answers. They know nothing about their investment, other than it’s up 1200% over the last 12 months. That mindset rarely leads to a good investment outcome.
Investing in bitcoin is a little different than investing in an index fund, and it should require more research and understanding; don’t let FOMO lead you to make an investment decision you wouldn’t normally make.
Disclaimer: Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimer page.