Bitcoin, the best-known of the upstart digital currencies, is still a mystery to many Americans.
If you've heard about Bitcoin, it's mainly from startling headlines about its 400 percent price gain earlier this year or its surge to nearly $5,000 last month, making it the the most valuable player in the mushrooming space for so-called cryptocurrencies. Or because Wall Street skeptics call it a "fad," a "fraud" and a "speculative bubble."
Believers in Bitcoin say it's the money of the future, a digital alternative to the dollar or euro or yen. Non-believers say it's not real money. After all, you can't dig into your pocket and pull one out like a $10 bill and hand it to a cashier at Dunkin' Donuts to pay for your morning coffee.
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Some investment pros say it's a new asset class, no different from a stock, a bond or an ounce of gold and that it has great investment promise. Skeptics say it's not an investment because there's no good way to value it.
Bitcoin is a digital currency and digital payment system that allows people to send and receive Bitcoins — or digital tokens — to anyone, anywhere in the world. It runs on a decentralized network of computers in which all transactions are recorded, verified and updated by technology known as blockchain, which is akin to an online public ledger. Unlike traditional payment networks such as Mastercard, Bitcoin isn't owned by anyone. There's no central authority, such as a bank or government, that's in charge of it.
An easy way to get started is to set up an account with a Bitcoin exchange, such as U.S.-based Coinbase, which allows you to purchase Bitcoins with money from your bank account or credit card. And just like the New York Stock Exchange is a place you can go to buy and sell stocks such as Apple or Amazon, these exchanges will let you trade cryptocurrencies.
Bitcoins purchased on an exchange or received in a transaction can be stored and accessed in a so-called "Bitcoin Wallet," which is like a bank account. A Bitcoin Wallet lets you receive Bitcoins, store or save them and send them to others. There are apps that allow you to install a Bitcoin Wallet on your computer or mobile device.
You can spend your Bitcoin at any retailer set up to accept Bitcoin as money to pay for purchases. But Bitcoin hasn't yet enjoyed widespread adoption, and those retailers that do accept it are mostly set up online. You can use Bitcoin to buy more than 1,000 products at discount retailer Overstock.com. You can also go online and use Bitcoin at Microsoft to buy apps, games and videos on Xbox, book airline tickets from CheapAir.com or hotel rooms from Expedia, purchase a satellite TV subscription from Dish Network or buy a sub sandwich from an Allentown, Pa., Subway store.
One way to get around retailers not accepting Bitcoin is to purchase gift cards for retailers such as Amazon or BestBuy at gift card makers such as eGifter that accept Bitcoin.
The price is determined by supply and demand — and market forces. The Bitcoin supply will be limited to 21 million, and currently there are roughly 16.6 million. Whether Bitcoin rises or falls in value depends on whether investors believe it will gain widespread acceptance, whether it can avoid being shut down by governments and whether it can continue to dominate the digital currency market or be surpassed by one of more than 1,100 other cryptocurrencies.
Bitcoin has gained most of its notoriety as an investment. A single Bitcoin ended 2016 at around $950 but skyrocketed to nearly $5,000 on Sept. 1. That's a gain of around 425 percent. But one of Bitcoin's downsides is that it has proved to be wildly volatile. Three weeks after hitting its 2017 peak, it had given back more than 25 percent before rallying back 20 percent to around $4,350 Friday.
That rapid ascent has been accompanied by wildly different prognostications about Bitcoin's future.
Bulls such as Thomas Lee, founder of Wall Street firm Fundstrat Global Advisors, see promise. His firm thinks Bitcoin could be worth $6,000 by the middle of 2018, 40 percent higher than current levels. His long-term target is as high as $25,000 by 2022. He believes Bitcoin will enjoy "expanded acceptance" as a digital currency and payment platform as well as "broader adoption" as a "store of value," similar to gold. He also sees a growing interest from big institutional investors, largely because the market cap of the cryptocurrency market has grown to an estimated $147.4 billion, according to CoinMarket.com.
But there are some big bears out there. Jamie Dimon, CEO of J.P. Morgan, has called Bitcoin a "fraud." At a recent investment conference, Dimon said, "Right now, cryptocurrencies are kind of a novelty." His fear is that when people start to lose money, governments around the world will eventually "shut down" exchanges that trade digital currencies. "It will end badly," he said.
But where Dimon sees trouble, others see profit-making opportunities.
Bitwise Asset Management, a San Francisco-based start-up, just introduced a new cryptocurrency investment fund. The Bitwise HOLD 10 Private Index fund tracks the top 10 cryptocurrencies weighted by market cap, including No. 1 Bitcoin and others such as Ethereum, Ripple, and Zcash.
Citing risk and a need to "proceed with caution," Bitwise co-founder Hunter Horsley says it makes more sense for investors to be able to buy a basket of cryptocurrencies to reduce risk through diversification. His firm's new fund will track the biggest cryptocurrencies, like the Standard & Poor's 500 stock index tracks the largest U.S. stocks.
"Our view is that, over time, as cryptocurrencies continue to ascend along with their potential, that more people will want to participate via investing," Horsley told USA TODAY. He says owning a basket of cryptocurrencies is better than owning just Bitcoin. He notes that Bitcoin, which made up roughly 85 percent of the total cryptocurrency market earlier this year, now accounts for about 55 percent of its total market cap. "You don't want to be trying to pick the winners," he says.
There are now at least 55 crypto-focused hedge funds, according to financial research firm Autonomous Next. And Goldman Sachs, a big Wall Street bank, is reportedly looking into a new trading operation involving Bitcoin and other digital currencies.
Don't buy the hype, value investor Howard Marks of Oaktree Capital Management counters.
"In my view, digital currencies are nothing but an unfounded fad, based on a willingness to ascribe value to something that has little or none beyond what people pay for it," Marks told clients in a letter in July."
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