Personal Finance

Finally! A primer on cryptocurrency (bitcoin) you will actually get, promise

How it is and isn't like regular currency, and what to consider if you're thinking of investing.

How it is and isn't like regular currency, and what to consider if you're thinking of investing

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Scott Stevenson was pretty uneasy the first time be bought bitcoin.

"I thought I'd be shooting myself in the foot a week later for wasting money on computer cash, internet money," he said, laughing.

But two years later, he's a believer. In fact, he's now an architect in a cryptocurrency system, programming peer-to-peer contracts that are paid with digital cash. So we went to him for a primer on cryptocurrencies — what they are and what someone might want to consider before dipping a toe in.

He's in for the money, but he also sees cryptocurrencies changing the way we live and the way do business. "It's about a lot more than just bitcoin for me," he said. "I have great faith in the technology, long term."

What the heck is this stuff?

For those still baffled by what cryptocurrency actually is, you are not alone. Think of it as digital cash — in a sense, Stevenson was right to call it "computer cash" or "internet money." It's a peer-to-peer currency, with no central authorities like banks or governments controlling or regulating it. Its value is determined by how many people are buying it and using it, and how many new coins are in circulation.

Like cheques, it's clear who the money is going to and who it is from. But unlike cheques, there are no banks or central authorities holding the money.

Instead, there is a huge network of computers running special bitcoin mining software. Those computers know how much bitcoin is floating around, what it's worth and who owns it. With this information, they maintain public ledgers, which are readable by anyone.

Bitcoin value changes when a new coin is "released" into the network. This happens when one of the computers on the network solves an extremely complex computation — the  puzzle created every time a bitcoin transaction goes down. Once the computer solves that puzzle, a coin is released in the network. That change in supply, combined with the demand, affects the value of the currency — inflation, really — which triggers a change in the ledgers.

Bitcoin was the first system that could make sure a coin given to one person really was different than a coin given to someone else.

People tend to be attracted to bitcoin and other cryptocurrency systems like Ethereum because there is no central regulator. The coin value won't be affected by stock market drops or government meddling, and the public ledgers, they say, make it all transparent.

Keep it cool

However, investing in cryptocurrencies isn't for the faint of heart. They're volatile - some days their value can swing wildly, going up by 20 per cent and fall back down within just an afternoon.

On the first day of 2017, one bitcoin was worth $997.69 USD. On Sept. 22 it's worth $3,560.

"Battling your emotions and learning to suppress your emotions is maybe the most important and hardest battle of it," said Stevenson. "The biggest thing I learned is to just have a plan."

Make a plan

To make that plan, start by asking yourself how much money you're comfortable losing — Stevenson suggests that's the amount you ought to invest.

You should also figure out whether you're in it for the long haul or whether you want to play the game day by day. Most people with regular jobs, said Stevenson, aren't going to have the time (or the nerves) to check in on the coin market multiple times a day. But if you decide to be an active trader, Stevenson says to be careful.

"You are competing against other very smart and dedicated traders," he said. "Most consumers lose to these active traders, just like the stock market."

Stevenson recommends setting solid parameters: decide what return you'll be happy with, what you won't be happy with and when you'll sell.

Ready to buy?

When you're ready to make a purchase, keep an eye on the news. 

"Be weary of the hype," he said. "I found the best times to buy is when people are not talking about cryptocurrencies. Try not to invest when everyone around you is investing."

Right now, bitcoin is in the news because the Chinese government banned all trading of cryptocurrencies. Stevenson advises to let that play out a bit before dropping a coin in your virtual wallet.

Eyes on the prize

As far the hype goes about the bitcoin boom being a soon-to-burst bubble, Stevenson isn't too concerned. Sure, he might lose some money, and he certainly enjoys making it.

But in a sense, he sees his investments in cryptocurrencies as investment in their potential and the future they could help create.

"Bitcoin is built on technology that is decentralizing many legal and financial services," he said. "It's enabled a lot of early adopters to get a lot of money that they're now investing in building new applications like peer-to-peer insurance and peer-to-peer loans."

Even if bitcoin completely collapses, Stevenson says there will still be a payoff.

"From out of that rubble, the long-term good apps will come out of it," he said. "The Facebooks and Googles of the world will climb out of it and stand the test of time. Those that do will drastically change how we live our financial and legal lives."