It’s the largest cryptocurrency in the world and Thursday, it climbed passed a level it had never seen before: $40,000 U.S. dollars.
If you haven’t been following the bitcoin craze, let me start by saying, it’s fascinating. I was one of the first journalists to cover the rise of bitcoin in its early years and I’ll tell you now what I said back then: the technology itself–the “blockchain”–behind this online “currency” is remarkable and formidable.
To bring you up to speed: Bitcoin was created in 2009 by an anonymous computer programmer (bitcoin “miner”) working under the alias Satoshi Nakamoto. The idea was to create an almost untraceable, worldwide, peer-to-peer currency. The currency’s value would not be determined by, say, a government or Central Bank like the federal reserve, but rather, it would be determined by the faith a particular group or market had for the currency itself.
Nakamoto is said to have “hid” bitcoin all throughout the online universe. The bitcoin can be gained through online computer “mining.” Effectively, people compete with computers to complete complex mathematical problems in order to “mine” the bitcoin. The bitcoin is given a value on various exchanges.
As the U.S. prepares to print more money via federal stimulus efforts and more accommodative monetary policies programs, the value of the U.S. is expected to suffer. As such, bitcoin is viewed as a kind of hedge against these pressures.
Indeed, in recent weeks, we’ve seen investors seek safe havens. From gold, to bonds, to yes–even bitcoin.
$40,000 is a high valuation given that this is a currency isn’t quite based on anything. After all, like gold, bitcoin has no intrinsic value. Nonetheless, like gold, bitcoin is priced in dollars and thus, as the dollar declines, it should take more dollars to purchase bitcoin. As such, I would expect that as the value of the U.S. dollar declines, the value of bitcoin should theoretically continue moving higher.
I would caution that any investors looking to jump into right now make sure they are well aware of the severe volatility associated with the crypto currency, as well as its overall risks. It’s critical to to understand the complexity of this new crypto world; bitcoin is effectively the Wild West of currencies…in the Wild West of the internet.
That said, if you have a long time horizon, bitcoin is proving to be an increasingly interesting and profitable investment and could be a helpful diversification tool in the future.