Cryptocurrency: good investment or financial disaster?

Cryptocurrency, such as Bitcoin, is an alternative currency that lives in the digital world and can be used either as an investment, or to buy real things. Depending on who you ask, it’s either the next big thing, or risky business. 

Is investing in cryptocurrency something to avoid, as financial titans such as Warren Buffett have said, or are physicians missing out on a prime investment opportunity if they don’t give it a try? The answer is somewhere in the middle.

Cryptocurrency is definitely not the place to pour an entire retirement savings, nor is it likely that medical practices will be adopting Bitcoin as a standard payment option anytime soon. However, if doctors are interested in the technology supporting cryptocurrency, generally distrust banks, or just want to try a new kind of investment, Bitcoin and other digital coins are worth learning about.

How does cryptocurrency work?

Though there are now about 2,600 types, Bitcoin was the first cryptocurrency (invented in 2009) and it’s still the most ubiquitous. 

Consumers can buy and sell Bitcoin and other digital coins, and use this digital currency to pay for purchases. It’s different from traditional currency because there are no bills or coins. Also, cryptocurrency is decentralized.

“When you send cryptocurrency to someone or use it to buy something, you don’t need to use a bank, credit card, or any other third-party type of intermediary to coordinate that transaction. The transaction goes directly from you to the other person (electronically) and arrives securely and almost instantly-all without any middleman involved,” says Mark Grabowski, JD, an associate professor at Adelphi University who teaches courses on Bitcoin and internet law. 

The decentralized model is what makes Bitcoin so attractive to many consumers and investors. 

“This is the first time in the last 100 years [consumers] have a medium of exchange that isn’t related to government, and we have full control of,” says Ofir Beigel, who runs 99Bitcoins.com, one of the oldest and largest information sites about Bitcoin and cryptocurrency. The lack of regulation is also what makes Bitcoin volatile, subject to both large gains and losses in a short amount of time. “Never invest more than you can afford to lose,” Beigel says. That’s true for buying Bitcoin or other cryptocurrency.

Getting started with Bitcoin

Whether physicians want to spend it or stockpile it as an investment, getting started with Bitcoin requires a Bitcoin wallet, which is a program similar to email that helps someone send and receive Bitcoin. 

An investor can either download a free software wallet to their computer or phone, or purchase a hardware wallet, which is a physical device that’s virtually unhackable. 

“Don’t spend money on hardware the first time, because it costs $80 or $90,” Beigel says. He advises starting with a small amount and only investing in a hardware wallet once someone gets comfortable with how Bitcoin works and/or are making larger investments.

After downloading a free wallet, a user will receive a Bitcoin address, which is a randomly generated long string of numbers and characters that acts as the user’s identifier. The second thing a wallet provides is a private key or seed phrase. This acts as the password to the wallet and should be kept secure.

Once the wallet is set up, the user can begin buying Bitcoins (or more likely fractions of Bitcoin, since a whole Bitcoin was worth $7,364 at press time). Buying from brokers, such as Coinbase-which both Beigel and Grabowski recommend to get started-is the simplest option, but it does cost more. 

“You should only buy from trusted exchanges online,” Beigel says. Another option is to buy from a trading platform, such as CEX.IO or Bitstamp, which securely connects buyers and sellers. These platforms are a less expensive way to buy Bitcoin, but Beigel says they are more difficult to use, especially for newcomers.  

The third way to buy Bitcoin is directly from other sellers. “This is the method I least recommend,” Beigel says, because there is a chance of fraud.  

In theory, Bitcoin spends like traditional currency. But that doesn’t mean it’s always easy to use. Bitcoin debit cards are available, Beigel says. The consumer loads the debit card with Bitcoin to use for spending, and the merchant gets paid in their own currency (dollars, Euros, etc.). 

That’s not highly practical though. Each time a person trades, sells, or uses cryptocurrency, that’s a taxable event, since the IRS considers them an asset, not a currency. “So, if you use your Bitcoin to buy a cappuccino, you’ll need to pay taxes at the capital gains rate in addition to paying sales tax,” Grabowski says.  

Investing in the crypto world

The cryptocurrency market is a lot more unpredictable than the stock market, Grabowski says. It’s volleyed back and forth since Bitcoin’s inception in 2009, and it still fluctuates wildly in any given 24 hours. 

“Unlike the nine-to-five hours of the New York Stock Exchange, cryptocurrency is traded around the world 24/7. So, you may go to bed at night feeling pretty happy about your portfolio only to wake up the next day and see you’ve literally dropped 25 percent overnight,” he says. 

That said, plenty of smart, experienced investors are betting on the future of cryptocurrency. One reason people are paying attention to crypto is because of the blockchain technology that supports it. The blockchain is the transparent ledger where every transaction is recorded independently; each participant in the network holds an identical copy (versus a central authority holding a master copy). Blockchain is already starting to influence healthcare. 

“This technology has many applications beyond cryptocurrency. In healthcare, patients’ records could be encoded and stored on the blockchain with a private key, which would grant access only to specific doctors. This could help ensure that medical privacy laws aren’t violated,” explains Grabowski.

Blockchain technology is the major reason most people who wouldn’t normally be keen on high-risk investments are looking more closely at investing in crypto, including investing in initial coin offerings (ICOs). 

Michael Kapilkov, a partner at MMVIII Capital, is an adviser to several ICO startups-meaning he works with companies who create a currency and want to offer coins to the public, the way a company would offer shares to the public. He also advises individuals looking to invest in ICOs. 

“When I talk to people, I tell them, you can make a lot of money, but you can also lose a lot, too. It’s high-risk, high-reward,” he says.

At any point in time, there are several dozen ICOs underway, Kapilkov says. There are a few basic things to keep in mind when thinking of investing. He advises that physicians to carefully study the ICO’s whitepaper, or rationale for why the currency exists. 

Also, it’s important to understand the “why” behind the coin: Is it solving a problem? Taking a new approach? Compare it to other coins, and check to make sure it has a solid advisory board. Do the people behind the coin have experience? Do they seem trustworthy? Investing is always a gamble, and it’s worth it to do basic research and work with an advisor who understands ICOs and crypto in general.

The barrier to entry for purchasing, trading, and investing in cryptocurrency is still rather high (given the purchase of a wallet and the details above), but that may change in the coming years. The technology that supports decentralized currency may very well be the path forward for significant innovation in many industries, and there is money to be made there, one way or another.