Finance boffins have
become increasingly interested in Bitcoin over the last year – especially as
the cryptocurrency can be so valuable.
Countless members of public have bought into this currency hoping
to get rich quick.
The Daily Star Online spoke to chartered accountant and finance
expert Carl Reader to find out more.
Governments are struggling to regulate the secretive online
currency Bitcoin. The cryptocurrency, which fuels the online black market, is
created by banks and banks of supercomputers solving complex sums at
hyper-secret "Bitcoin mines."
What is Bitcoin?
Bitcoin is the world’s first decentralised digital currency –
meaning there is no central bank or administrator.
Carl explained: “It is a form of ‘cryptocurrency’, a digital
currency which is transferred between users with a value measured in US
dollars.
“This currency can be
‘mined’ using computer power to obtain some of the 21 million Bitcoins, which
is the limit of this cryptocurrency in existence.
“There is an underlying technology known as ‘blockchain’ which
records each transaction, so that the receiver can ensure that the sender owns
the currency, and also so that transactions can be verified without a central
bank being involved.
“It is important to remember that Bitcoin is one of many
currencies available.”
How can you make money with Bitcoin and other cryptocurrencies?
Just like with any money-making method, investing in digital
currency can be risky business.
While it can be very lucrative, there is no guarantee that the
value of Bitcoin won’t drop significantly.
Carl Reader revealed his top five tips.
EXPERT COMMENT: Finance buff Carl Reader exclusively spoke to the
Daily Star Online
1. Be prepared
Before investing money into any project, it’s important to do as
much research as possible.
Carl advised: “There are plenty of sources of information online,
and there are active investor communities, such as on Facebook, where you can
join the groups and ask questions.
“Remember that other users are often biased towards their own
investments.”
2. Be secure
Just like with physical cash, it’s important to keep your Bitcoin
safe by keeping it as protected as you can.
This often means backing it up and keeping your devices as
security and anti-virus protected as possible.
Carl recommends: “Cryptocurrencies are open to security risks.
Each currency is held in a digital ‘wallet’, and I would suggest that you use
an official one for the currency that you choose to invest in.
“There have been instances of unofficial wallets installing
malware onto PCs, which could cause all sorts of issues.
“Users can also be subject to phishing attempts. Finally, you
should make sure that you make a backup of your digital wallet.”
3. Understand the
fluctuations
As Bitcoin and other digital tenders are still in their infancy,
investing time and money into them doesn’t guarantee success.
Reading up about these risks and learning more about fluctuations
will help you stay on top.
Carl explained: “At the moment, cryptocurrencies are extremely
volatile. It is likely that as they become more mainstream, the market will
find it's feet.
“As it stands, I would suggest that you be prepared to view it as
more of a gamble than an investment.
“As with all assets, gains are made at the point of purchase at
the right price as well as at the point of sale, so try to pick the right time
to invest!
“And always remember - never invest more than you can afford to
comfortably use, and don't rely on one asset class to provide you with any form
of long term return.”
4. Liquidity is key
Cryptocurrency can be completely useless if you can’t convert it
into physical money you can spend in the real world.
Carl said: “Make sure that you can convert your chosen currency
into traditional currency, and find out how much you can withdraw at any one
time.
“You should also find out about the reliability of any exchange
that you use, as some have been known to crash at peak times.
5. Bet on the fundamentals
As the future of finance is constantly evolving, it’s advisable to
keep a check on how different cryptocurrencies are developing.
While Bitcoin is one of the most talked about digital tenders of
the moment, it may not always hold this position in the future.
Carl predicts: “The eventual winner of the various currencies will
most likely be whichever currency has the best backing, and the best underlying
technology.
“For a cryptocurrency to be able to truly replace our current
currencies, the underlying system must be able to handle far more transactions
simultaneously than the current blockchain technology, and the costs per
transaction must become negligible.
“In fact, it is quite likely that the future mainstream currency,
and the method of maintaining it, has not been invented yet.
“If you wish to invest now, look past any historic performance,
and instead look at the fundamentals of each currency.”
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