You may have read or heard about the “Nixon Shock” of 1971 when President Nixon abolished the Bretton Woods international financial exchange system. The Bretton Woods monetary exchange system was an agreement between the United States, Canada, Western Europe, and a host of other prominent countries to back their respective currencies against a set amount of gold.

This made for a more efficient and smooth exchange of money in international trading as countries knew precisely what the value of different currencies was about gold. However, this system couldn’t keep up with the population growth and trade increase because there is only a finite amount of gold in the world. Due to this reason and the rising inflation in America, the then President of the U.S., Richard Nixon, drew out of this agreement and replaced it with a freely floating fiat.

Now the U.S. dollar had no gold backing, and the treasury could print billions of new notes. This was an extremely controversial and difficult transition for people to comprehend. The realization that paper money has no real value, but the one government has deemed on to it, was cause for many conspiracy theories at the time and even now.

Now imagine a currency that, on top of having no gold backing, is also virtual. There are no physical notes, no government regulation, no agreements or legislation. It exists entirely as code in a digital wallet in a server somewhere.

This is a cryptocurrency, and the most popular one that we all know of is Bitcoin.

What is Bitcoin and How Does it Work?

Bitcoin is a virtual currency that exists as a computer file. You can use it to buy products and services online. However, most people use it for trading.

Your bitcoins are stored in a digital wallet as code. You can either carry it on a smartphone app or access it online using a browser on a laptop or computer.

You will never see a physical manifestation of a Bitcoin, the coins you see in images that have the Bitcoin symbol on them are just for showing purposes.

How Are Bitcoins Created?

I am sure you have heard of the word “mining” before, only here it doesn’t mean physical mining like in a coal mine. Instead, the word mining is used for the process whereby Bitcoins are created. Mining is when a computer is used to calculate and solve complicated equations. When the calculation is successful, the “miner” is rewarded with a Bitcoin.

However, this only sounds simple in theory. The amount of processing power required to carry out these calculations is so high that even with the most powerful rigs, it would take years before you could mine one Bitcoin.

The electricity expenditure alone would surpass the value of a Bitcoin in the time it would take to mine a single one. Unless you live in a country with incredibly cheap electricity and you have the money to buy powerful mining rigs, turning a profit from mining is not something everyone can do.

Around 2009, when Bitcoin was initially launched, people could mine multiple Bitcoins in a day using only their personal computers. The calculations were the easiest at the time, and there was no competition. However, not many people had the foresight to predict Bitcoin’s success at the time.

Most people would mine as a hobby or because they were fascinated by how the whole thing worked. At the time, the value of Bitcoin was non-existent, and not many people imagined that one day it would surpass even a thousand dollars.

Today, one Bitcoin is worth around 50,000 thousand U.S. dollars. A number that is far beyond anyone’s wildest imaginations.

How Do People Make Money From It?

The most common way to make money from Bitcoin is to trade it. Here is how it works in short. The idea is to buy Bitcoin or a fraction of it when the price dips low in the market. When you purchase it, you will hold it until the price surges again. Once the price reaches a peak, you will sell your Bitcoin and reap the rewards.

Another way is to mine Bitcoin; however, this is a mindboggling process and takes a hefty initial investment to set up shop. Since this article is aimed towards college students, mining Bitcoin is out of the question.

Should a College Student Trade Bitcoin?

Currently, Bitcoin is already at a peak, and there is little money to be made from investing in it. However, since markets and trends are constantly shifting, making money from it is still possible if you know how it works.

However, do know that it is not as simple as it sounds, and there a barrage of risks that come with it. Let’s look at some of the significant risks involved in trading Bitcoin.

Infant Technology and No Regulations

Bitcoin is only a decade old, and it has yet to develop into something concrete. The markets are still young, and the whole process is somewhat unstable at the core. There is no telling how this would evolve in the future, and for all we know, it might cease to exist altogether. The best way to approach it is with caution and in small steps.

Anyone considering investing in Bitcoin should study the markets and trends at length and learn how it all works. The lack of regulations by a centralized body also makes things worse. There is no paperwork or legislation behind the currency. It is all done independently, which means the people at the very top get to make the rules.

In theory, you could lose everything overnight, and no one would be held responsible. There will be no payouts, and everything can vanish in a split second.

Block Withholding

Bitcoins are created through a process called “Mining,” where powerful computers solve complex mathematical equations called “blocks.” Blocks are made every time a transaction takes place. Miners could mine a block and hide it from sincere miners in the pool. This is called “Block Withholding,” and selfish miners can potentially ruin the market by not broadcasting their blocks to the network.

This vulnerability in the Bitcoin system gives disproportional influence to miners who possess a large chunk of computational power in the mining network. They can misuse their position to earn illegal rewards leaving the whole system worse off for other people.

The threat of Cyber Attacks

Cyber attacks are a genuine problem in the world of Bitcoin. It doesn’t require profound insight to know that computers, the internet, and money doesn’t fare well together. There have been significant attacks on Bitcoin exchanges in the past, and they will continue to happen as hackers come up with innovative ways to breach security.

The most notable attack of such nature happened in 2014. Hackers made out with 850,000 Bitcoins from Mt Gox, the largest bitcoin exchange in the world at that time. The value of those stolen Bitcoins comes out to a staggering $7.2 billion at today’s value. Mt Gox never recovered from the attack and filed for bankruptcy shortly after that.

Anyone getting into Bitcoin should have an understanding of how vulnerable the system is to cyber-attacks. Losing your investment overnight to such an attack is not a pleasant thought, and the effects could leave you financially crippled.

Fraudulent Exchanges

In addition to hacking, many fraudulent players in the market are looking to make a quick buck at your loss. You need to be wary of fraudulent exchanges because some of them appear more than legitimate until they run off with your Bitcoin.

There have been countless instances of fake trading companies duping customers out of their Bitcoin. Since the whole system is electronic, there is no shortage of criminals who develop creative ways to trick people.

You need to be aware of all such scams before stepping into the world of cryptocurrency. Do your research and familiarize yourself with various cons so that you can prevent it early on.

Extreme Volatility

In the world of finance, volatility is a measure of how prices or returns are scattered over time for an individual asset or financial product. Since Bitcoins are primarily used for investment purposes, the value of Bitcoin is continually shifting.

To get an idea of how volatile Bitcoin is, consider this. On 17 December 2017, the price of Bitcoin hit an all-time high of $19,783. Days later, on 22 December, the value of Bitcoin fell below $11,000, making it a 45% loss.

A year later, in November of 2018, the whole bubble popped, and the price of a Bitcoin fell to a mere $5,500. This extreme volatility is not safe for long-term investments, especially in more significant amounts.

What does this mean for a College Student?

Given how complex the world of cryptocurrency is, It can take a long time to learn its intricacies. You would have to invest some serious time and effort into learning the tools of the trade. If it were easy, everyone would be doing it, and there wouldn’t be a plethora of courses dedicated to teaching it.

Anyone who has no prior experience with stocks or trading would find it very complicated in the beginning. You would need to learn critical functions, practices, trends, and a lot of jargon to buy and sell bitcoin.

Considering how time-consuming college already is, I don’t think it’s worth the risk and time to delve into Bitcoin. If you are serious about your education and care about your grades, Bitcoin will only bring needless stress to your life.

Moreover, you have to understand that Bitcoin is at an all-time peak currently. It would be extraordinarily reckless of anyone to buy Bitcoin in the current climate, hoping to profit. Not to mention the volatility factor, which is exceptionally high for comfort.

Instead, I would advise that you ease into it rather than leaping. I am not saying that Bitcoin investment is not a worthwhile strategy overall. However, there is a lot to learn and many ways it can all go very badly.

In researching this article, I have had to read multiple articles and watch videos to understand surface-level stuff. If I were to explore further, it would take me weeks to understand everything to an extent where I would be comfortable investing my hard-earned money.

If you want to explore cryptocurrency, I will encourage you to do so. Learn about the markets, visit various forums and ask questions. Once you have a concrete understanding of the risks and rewards, only then invest.

You don’t want to lose whatever money you have as a college student. Most college students rely on loans to pay their tuition and work odd jobs to sustain day-to-day life. Losing money in such circumstances is going to be devastating for you.