What is BITCOIN and how to Invest in it

What is Bitcoin?

Bitcoin arrived on the scene in 2009. The digital currency is created and held electronically. Its value stems partly from the fact that it's decentralized; no single institution or government controls the network. It was developed based on a proposal from a software developer called Satoshi Nakamoto, according to CoinDesk, which tracks cryptocurrency prices and reports on events in the crypto space. Low transaction costs are another feature along with instantaneous transfers.

Perhaps its biggest attraction is that its supply can't be increased or decreased at the whim of a controlling entity. Similar to gold and other precious metals, Bitcoins can be "mined," but it's done by using computing power in a distributed network. And like gold, Bitcoin supply is limited. And it's headed toward terminal creation.

Bitcoin rules state that only 21 million Bitcoins can ever be created, though the coins can be split into smaller parts. That could make Bitcoin, like gold, an attractive inflation hedge, backers say. There are 16.67 million Bitcoin in circulation now.

On the other hand, the potential creation of new digital currencies creates "the possibility of limitless supply of different cryptocurrencies," undermining the value of existing ones, UBS warned recently.

Bitcoin vs Gold

SPDR Gold Shares (GLD), an ETF that tracks the price of gold bullion, is up about 12% this year. That might look meager next to Bitcoin's surge. Hence, internet news searches for Bitcoin now outnumber those for gold.

But cryptocurrencies have been volatile. On the way to its all-time high this year, Bitcoin plunged 28% from $2,682.59 on June 12 to $1,938.94. And it plummeted 35% from $4,950.72 on Sept. 1 to $3,336.41 on Sept. 14.

Critics warn of a bubble. "The relatively high volume of cryptocurrency turnover, against limited real-world use, suggests that many buyers are seeking speculative gain, never intending to use cryptocurrencies to make a real-world transaction," UBS analysts said in report quoted by CNBC.

The blockchain software behind Bitcoin makes the digital currency a method of transferring value, but unlike at, say, a bank or real estate company. With blockchain, those expensive middlemen are no longer needed to ensure a transaction takes place as intended, a protection supplied by the blockchain software itself. The result: faster and cheaper transactions.

And since blockchain and cryptocurrencies offer various layers of anonymity, they are seen as attractive to those living in countries where transfer of wealth is restricted. Detractors say cryptos also draw drug dealers, money launderers and tax dodgers along with legitimate investors.

Coinbase is involved in a lawsuit in which it's trying to fend off IRS attempts to scan customer accounts for unreported taxable gains, Bloomberg reported.

How People Invest in Digital Currencies

Those who want to own cryptocurrencies directly can go to exchanges to buy and trade them. Some of the largest are U.S.-based Coinsetter, Coinbase, Cryptsy, London-based Bitsamp and Bulgaria-based BTC-e.

They'll need what the industry calls a wallet to store the private keys that give access to cryptos. Major exchanges offer soft, or hot, wallets for customers. Such wallets are available for desktop computers and mobile devices and include Bitcoin wallet, Mycelium, Xapo and Blockchain, according to Coindesk.

Hard wallets in the form of flash-drive like devices bring an extra layer of security, by limiting exposure to the internet. They have to be plugged into a computer or phone before they can be spent. Three popular ones, according to Buybitcoinworldwide.com, are Ledger Nano S, KeepKey and Trezor. Just remember, don't lose it, forget your password or fail to back it up, or you might lose your cryptocurrency forever.

While proponents extol the fraud-proof safety of blockchain technology, wallets have proved vulnerable. In the latest mishap, an estimated $280 million of Ethereum ether coins were locked up after a user accidentally deleted the code needed to access digital wallets hosted by Parity Technologies. The freeze affects all multisignature wallets created on Parity after July 20.

Ethereum has jumped 5,810% this year from $8.03 on Dec. 31 to $474.59 midday Monday. It surged as high as $493.41 early Monday.

Meanwhile, the financial industry is moving ahead.

In other moves by financial companies to bring Bitcoin to investors, on Sept. 6, CoinIRA, Goldco's digital currency unit, launched its new Digital IRA Bundles. The bundles, available in amounts of $25,000, $50,000 and $100,000, come prepackaged with digital currencies. Investors can choose from three portfolios based on their risk appetite: conservative, moderate or aggressive. The conservative bundle is made up of 50% Bitcoin, 41% Ethereum and 3% each in Ether classic, Litecoin and Ripple.