Everyone wants to understand how bitcoin works before they invest – but is that really necessary?


Late last year I joined a small tech startup, SetDev, as their head of operations. While we aren’t an exclusive blockchain company, all the engineers are relatively early adopters of cryptocurrencies and with that comes a lot of “Bitcoin talk.” It’s pretty typical for someone on the team to have one of their friends reach out almost daily and ask a bunch of cryptocurrency questions which always start with, “I want to know enough so I can make some investments.”

After the last couple years of a rollercoaster ride for Bitcoin, it now seems the vast majority of investors are somewhat scarred from their losses in the crypto space. I would venture to say at least 80% of people that have made investments in Bitcoin and other cryptocurrencies are down money. And because most of these people invested during all the hype, they now seem to be extremely hesitant to make any additional crypto investments until they fully understand the technology behind the hype.

And all the people that avoided jumping in during the hype? Well these people feel like geniuses and are even less likely to invest now that they have been able to tell their friends “I told you so,” without having done an adequate amount of research to be able to justify their decision to their friend group.

So where does this leave us?

With a large swath of the population thinking that they need to fully understand how Bitcoin and other digital assets work before making any investments in them.

I don’t happen to agree with this logic…

I’m not going to go on and preach about blockchain technology, and Bitcoin, and Ethereum, how they may change the world and so on – rather, I am going to discuss why the prevailing idea that you must know how these digital assets function is incredibly flawed.

When you think of one of the highest performing stocks of this millennium what comes to mind?

Likely Amazon (AMZN). Almost every broad ETF and Mutual Fund includes some exposure to Amazon. Most individual investors hold Amazon or wish they did.

Do you know what line of business contributed to the majority of Amazon’s operating profit last year?

It’s a line of business that most don’t even know exists.

Amazon Web Services, AWS, had a $4.3 Billion operating income while their ecommerce business actually turned a slight loss since their International loss eclipsed their North American profit ($3.06B loss Internationally vs $2.84 profit in North America).

How about Ford Motor Co? Also, a part of many portfolios.

Do you have any idea how the internal combustion engine works? How about power steering – the little addition that makes it easy for you to turn the wheel which would otherwise be an upper body workout.

What about email? We all use it, but do you have any idea how the information is transferred? What about how it’s encrypted in a way to make it almost impossible to intercept messages and read their contents?

I could go on and on with examples like this. The reason I mention the email example is because I think it’s the most similar to Bitcoin when you take into consideration the history. In the beginning, you needed to have a huge clunky device called a computer to even get started. Then you had to understand how the computer worked, like really understand, not just clicking a power button. In fact, when Ray Tomlinson sent the first email in 1971, he was experimenting by connecting the functionality of two programs, CPYNET and SENDMSG in quite a clever way.

Right now, we view Bitcoin miners as foreign and hard to understand (like how we used to view computers). And with the incredible hype Bitcoin has gotten in the past few years along with the apparent bubble that burst in early 2018, we all view the currency as a foreign, complicated, and risky investment. Except all you really need to know is about the last one – the risk.

Bitcoin is a risky investment for a variety of reasons. There are concerns about scalability, regulation, necessity, and security.

Scalability since if everyone woke up tomorrow and decided to use Bitcoin for daily transactions, the network would overload and becoming ridden with incredibly high fees. There are tons of developers and organizations working on finding a solution to this, most notably Lightning Labs which secured $2.5 Million in funding earlier this year, some of which came from Twitter and Square CEO, Jack Dorsey.

Regulation because the SEC and other worldwide regulatory agencies have given mixed signals on how they plan on handling this new asset class, not to mention the fact that some currencies are completely anonymous which is certainly a cause of concern for centralized governments that attempt to track the money supply.

Necessity since as much as the technology is cool and different, we still aren’t certain that the blockchain is the most effective improvement to our current monetary systems. Although, I can say with certainty that we will need a currency that has a finite supply.

And finally, security. It’s not clear exactly what the proper set up would be in a world where cryptocurrencies are used for everyday transactions. First off, digitally, securing your Bitcoin would have to be at least as safe (and maybe even insured) as sending encrypted emails. Off the internet, people certainly shouldn’t be walking around with the entirety of their Bitcoin in a wallet since that would create an obvious target for hostages to be taken left and right.

Those are the most obvious reasons that Bitcoin is a risky investment.

So, should you invest in Bitcoin?

It depends on your risk tolerance and financial position. If you do, be prepared to let that investment sit for at least a few years since the issues I mentioned above will take some time to pan out. Also, be comfortable losing most or all of your investment, since I really don’t see Bitcoin settling around its current level. The issues mentioned above will either be solved, and Bitcoin will take over a large portion of worldwide financial transactions or they won’t, and Bitcoin will go back to sub $100 levels.

But no matter what you do, don’t let anybody talk you out of investing in Bitcoin because you can’t explain SHA-256 encryption, mining, or how the blockchain works. Ask them to explain AWS or how an internal combustion engine works.

Follow me on Twitter as I fact check the masses: @pokerpercal

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Alan Percal
Alan is the Co-Founder and CEO of PERC360 Media. He is an accredited Associate of the Society of Actuaries (ASA) and enjoys playing poker and golf in his free time. He is the head poker coach at ZeroSumPokerCoaching.com if you're a poker player turned crypto user and you can join him in the CryptoMarket360 Facebook group!