Bitcoin: What you need to know before investing

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In this April 3, 2013 photo, Mike Caldwell, a software engineer, holds a 25 Bitcoin token at his shop in Sandy, Utah. Bitcoin is an online currency that does not involve banks, credit card issuers or other third parties.(SOURCE: AP Photo/Rick Bowmer) In this April 3, 2013 photo, Mike Caldwell, a software engineer, holds a 25 Bitcoin token at his shop in Sandy, Utah. Bitcoin is an online currency that does not involve banks, credit card issuers or other third parties.(SOURCE: AP Photo/Rick Bowmer)
(DATA DOCTORS) -

Q: Is it time for me to invest in Bitcoin and if so, where can I learn more?

A: Cryptocurrencies such as Bitcoin have long been the domain of the tech-savvy and rather confusing for the average consumer. The confusion continues for most people, but with the massive increase in the value of Bitcoin since the beginning of the year, it’s getting a lot of people’s attention.

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[READ MORE: Bitcoin just blew past $11,000. What next?]

A single Bitcoin was valued at just under $1,000 on Jan. 1 of this year and by the end of November, it has popped up over $10,000 with new highs being reached almost daily.

I did a TV news segment in 2011 to try to help explain this "new currency," and almost bought one just for the story. At that time, a single Bitcoin was valued at just over $3 – my loss!

It’s not surprising that anyone who simply looks at this at face value would consider it an investment opportunity, but this is far from anything resembling a traditional investment.

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Wildly volatile
Bitcoin has been extremely volatile from the beginning, with extreme changes to the value both up and down being commonplace.

Because there is no central bank, virtually any news story surrounding the use of Bitcoin from anywhere in the world can quickly impact the value. In 2013 for instance, the value dropped in half overnight because of a change made by China’s largest Bitcoin exchange.

There have been Bitcoin exchanges that have been hacked, shut down by governments or, in some cases, simply disappeared with the funds, so it’s far from a normal currency. There are now more stable exchanges such as Coinbase that are backed by banks, large venture capital firms and even the New York Stock Exchange

The current run-up has many predicting a crash but the reality is that we are in uncharted waters when it comes to cryptocurrency. Anyone who claims to know where all this is going is simply speculating based on traditional financial models, which really don’t apply to this new phenomenon.

But with the massive acceleration in the value of Bitcoin in such a short period of time, it’s easy to see why so many "experts" are calling it a bubble that’s bound to burst.

Various ways to invest
Jumping into the frenzy and buying a fraction of one Bitcoin is just one way of getting started, but based on what has transpired recently, that seems very risky.

There are other cryptocurrencies in addition to Bitcoin that are substantially cheaper to buy such as Ethereum and Litecoin. Coinbase makes it easy to buy any of them via its app if that’s your preferred method of investing/gambling.

There’s a decent chance that you’ll be able to invest through an ETF (Exchange Traded Fund) sometime in 2018, which will spread your risk over many different cryptocurrencies and the CBOE (Chicago Board Options Exchange) recently announced that it plans to offer Bitcoin futures and options in the near future.

Educate yourself
Whatever you decide to do, educating yourself is essential. There are many "beginner’s guides"available online, so if you have a favorite financial resource, search its website first.

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