This time around I am going to jump on a fairly hot topic and discuss the crypto-currency that is Bitcoin. For me I am still on the fence about whether or not this is a good investment as there seems to be a pretty even number of pros and cons for it. So what I will do then is break them down for you and let you decide for yourself.
Let’s start with the good stuff first:
– Given the way the algorithm for generating the currency works there will be a limited number of them, which puts them into a class of holdings like gold and silver since whatever there is, is all there is. No more Bitcoins will be produced once the max amount of them are mined out.
– Based on the previous positive, that means speculators like Max Keiser are somewhat correct in their assessment that the potential upside to Bitcoin is practically infinite. However it’s worth noting by the same standard so are gold and silver yet those still manage to have a reasonable price tag associated with them.
– Because there is no government attached to Bitcoin, there is a positive in that when countries screw the pooch (like the U.S. has been) there currency doesn’t suffer. This also means no awkward manipulations on behalf of the government can occur (see the current currency war).
These are all great plusses, and I’m sure there even more but these should be enough to make the point. The point of course is that in the age of declining fiat currencies, alternative investments such as new currency types may be the future of currency, and Bitcoin is not just the first but the current top of its class.
However what has prevented me from ever putting down any cash is what I feel are the seemingly overwhelming problems with it. Here’s those:
– Earlier this year the market for Bitcoin, Mt. Gox was hacked, causing investors to lose tons of cash. This seems to be a problem that occurs regularly although not on as large of a scale. Many market manipulators have gone to YouTube and discussed just how easy it is to bog down the system temporarily which allows them to basically double spend their Bitcoins, or just manipulate the price by small amounts (which when done a large number times, can lead to big profits).
– Another problem is with the primary users of Bitcoin. some research has shown that Bitcoin is becoming the currency of the illegal drug trade, making it a he target for seizure from governments.
– The most glaring issue however is that it is, in fact, a digital currency. With no physical substance to back it, its value is based solely on what the community wants to pay for it, which means counter to an above point it can hit zero dollars a piece, just as easily as it could 1,000 dollars a piece . The other problem with it being strictly digital is security. What if the system which maintains the stock of Bitcoins (which is usually referred to as the wallet) is compromised? What do you do if your Bitcoins are just missing one day? There are plenty of claims that such things are not able to happen, but I’m not convinced. With huge profits comes thieves and crooks, and I don’t think Bitcoin is any different than any other tradeable thing since the dawn of markets.
Years ago I had the opportunity to get into Bitcoin when they were valued at around $7 U.S. each and passed due to my concerns listed above. Of course at that time it hadn’t been hacked yet, but given my involvement in the computing world at the time I was convinced it was only a matter of time. Nothing is hack proof. Just like there is no perfect home security, there isn’t one for the internet either. If someone wants something bad enough, they’ll find a way to get it.
Currently Bitcoin trades at around $190 U.S. and seems to be moving up rapidly. Personally my risk tolerance isn’t high enough to gamble on it, but if yours is I recommend you do some serious research before dumping your hard earned cash into Bitcoins. Till next time,