What Is Bitcoin—and Should You Use It?

What Is Bitcoin—and Should You Use It?

by A. Scott White, CFP®, ChFC®, CLU®
President, Scott White Advisors

Have you heard of Bitcoin? It’s a form of cryptocurrency: digital money that allows for peer-to-peer transactions on the internet via a digital representation of value that isn’t backed by any government or central bank. While services like Venmo and PayPal rely on the traditional financial system to transfer money, Bitcoin allows any two people, anywhere in the world, to send Bitcoin to each other without the involvement of a bank, government, or other institution.

Every transaction involving Bitcoin is tracked on the Blockchain1, a log of customers’ funds going in and out. The Bitcoin Blockchain is distributed across the entire network and anyone can become part of the network—no third party is in control of it. According to Experian, purchasing Bitcoin isn’t free of risk2.

While Bitcoin has skyrocketed as much as 350% in the past year to record highs, Warren Buffett has said Bitcoin and other
cryptocurrencies are risky and worthless.3 “I can say almost with certainty that they will come to a bad ending,” the billionaire investor and Berkshire Hathaway CEO said. AARP says that cryptocurrency fraud is on the rise. Be aware of risk and fraud potential, and follow these AARP guidelines:4

  • Don’t put money in a virtual currency investment if you don’t really understand how it works.
  • Don’t speculate in cryptocurrencies with money that you can’t afford to lose.
  • Don’t buy virtual currencies based on anonymous tips that you picked up from chat rooms or social media.
  • Don’t put money into an individual retirement account advertised as “IRS approved” or “IRA approved.” Some self-directed IRAs do allow investment in virtual currencies, but the Internal Revenue Service does not approve or review IRA investments.
  • Don’t share your “private keys”—the long letter-and-number codes that enable you to access your virtual currency—with anyone. Keep them in a secure place.

Even if you’re not being scammed, the virtual currency trade is speculative and volatile. As the Federal Trade Commission notes, “An investment that may be worth thousands of dollars on Tuesday could only be worth hundreds on Wednesday.”4