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What Is A Bitcoin? Thumbnail

What Is A Bitcoin?

I had a request to write a blog about Bitcoin. I've also had numerous friends the last several months ask about Bitcoin. What is it? Should I invest in it? I'm a financial advisor that specializes in retirement planning. My job is to align peoples investments with their goals in retirement. What I do isn't sexy and doesn't make the news but it works and it has for well over 100 years.

So let me put this out there. I have a negative bias towards any investment that you can't explain to a 5th grader. I try to simplify my client's lives, not complicate them. That being said I would never recommend Bitcoin for a retirement portfolio. However, that doesn't mean it's bad. No investment is inherently bad. The question we need to ask before we invest in anything is: Is this the right investment to accomplish my goals or, in other words, is this the right tool for the job? So...what is a Bitcoin?

What Is A Bitcoin?

Bitcoin is a digital currency that was created in 2009 by a person that goes by the pseudonym Satoshi Nakamoto. Allegedly no one knows who the person really is. Bitcoin is a cryptocurrency meaning that there are no physical Bitcoins. There are no bills or coins to make. It's all created over the internet using complex computing and coding. Bitcoin balances are kept on a public ledger that everyone has access to and Bitcoin is not backed by any central bank or government. Like all investments, Bitcoins are worth whatever anyone is willing to pay for them. Bitcoin is anonymous and nationless cash.

How Does Bitcoin Work?

Bitcoin users exchange their "coins'' for goods and services or they trade the "coins" for cash. They pay electronically using a mobile or computer app similar to Paypal or Venmo. All the transactions are handled anonymously. 

The Bitcoin system is a collection of computers that run Bitcoins code and store it in a Blockchain. A Blockchain can be thought of as a collection of blocks. In each block is a collection of transactions. Because all the computers running the blockchain have the same list of blocks and transactions and can transparently see these new blocks being filled with new bitcoin transactions, no one can cheat the system.

Here is an example of how this might work:

Imagine four strangers sitting in a room, each with their own ledger. Because they are strangers they don’t know or trust each other.

One stranger gives one Bitcoin to another stranger. Now, EACH of the four strangers records this transaction. They then compare all their ledgers to make sure they match.

If all four notebooks match up, everything is fine. The transaction is approved by everybody. If one notebook is different from the other three, we have a problem. It means one stranger is lying about the transaction. We also know which stranger is lying (hint: it’s the one with the ledger that doesn’t match the others). As a result, the three others ignore the ledger that doesn’t match and move on. The transaction is not approved.

Bitcoin works exactly like the notebook example. Each Bitcoin user has an identical copy of the Bitcoin “ledger” which publicly records all transactions. All notebooks get constantly compared to make sure they match. Bitcoin also stores all past transactions permanently so that there is a record of where all Bitcoin currently are.

How Do You Buy Bitcoin?

If this all sounds like something you would like to invest in you only need a digital currency account to start. I'll save you the explanation. Just Google digital currency account. Paypal also allows users to buy, sell, and hold Bitcoins. These accounts act like a digital wallet in that you just upload your information and money and you can buy Bitcoins. The process is that easy.

How Are Bitcoins Made?

Bitcoins are made by a process called mining. Bitcoin miners are anonymous people that essentially validate a block of Bitcoin transactions (blockchain) and they have to be the first person to solve a numeric problem to get paid. A miner that is able to do this gets paid 6.25 Bitcoins or approximately $100,000. Clear as mud right?

The anonymous Satoshi Nakamoto, the creator of Bitcoin that doesn't use his real name and who no one knows who he is, limited the overall supply of Bitcoins to 21 million and the last Bitcoin won't be mined until 2140.

What Is A Bitcoin Worth?

As mentioned earlier, Bitcoin (or any investment) is worth what someone is willing to pay for it. Without any governing authority like we have for our national currency, or a correlation of earnings like we have for stock prices, it's totally up to the buyers of Bitcoin as to the worth. There are no consistent pricing tools and that's why the price of Bitcoin can fluctuate wildly - to put it lightly.

In July 2010, a Bitcoin was worth 8 cents. In November 2013 it was worth $1,000. In early 2017 a Bitcoin was worth $5,000 and then increased to $20,000 in December of 2017. And by November 2018 it was worth $3,500.

Then in 2020, the Bitcoin roller coaster started climbing again. It reached an all time high of $42,000 per Bitcoin. Today one Bitcoin is worth $48,000 US dollars. There you have it. For $48,000 you can have one coin of anonymous currency created by a person that uses a pseudonym for a name and isn't backed by any central government. As for me, I'll take a hard pass.

80/20 Financial Investment Philosophy

We don't invest your money in high risk investments. We don't believe in creating wealth quickly. We believe in creating wealth for certain. And we believe that can only be achieved through a program of lifetime investing in quality companies.

Our investment policy this year is driven by the same principles it was last year as it will be a year from now. We tune out the negatives and the current fads and we focus on what we can control. We make investment plans that focus long term and that will be in placefor 20 years or longer. Simply put we put our faith and our money in over 500 of the best companies in the world.

An investment should be used to accomplish your goals through a finacial plan. If Bitcoin meets that criteria for you then you should own it. But a good rule of thumb is if you can't explain it, don't invest in it. Treat it like you would a casino. Walk in with only the amount of money you are willing to lose. If it sounds too good to be true then it very well could be.

You Need A Plan

A goal of retiring - without a plan to get there - is simply a plan to never retire. Retirement isn't some magical age. It's a dollar amount. If you're age 50 or over and still in the accumulation phase (pre-retirement) we can help you figure out where you need to go and how to get there. If you are retired or nearing retirement, we can create a plan which will outpace inflation and possibly leave a legacy to your family. The consultation is free and without obligation. Contact us to set up a consultation.

For more articles about retirement planning and investing, click here.

Thanks for reading!

Brian Coleman/Retirement Income & Investment Planner

80/20 Financial Services is an independent Registered Investment Advisory Firm. We help clients age 50 and over plan their retirement income and investment strategies. Contact us today for help with your retirement needs.