Every few years a new investment hits the scene and captivates investors with the promise of overnight riches. The new thing today is Bitcoins, whose popularity has been skyrocketing in recent months.
Having heard the term over and over again, and yet not really understanding what Bitcoins really were, I decided to take a closer look at them and decide if they were something I should be investing in.
What are Bitcoins?
This is the first question you should be asking. Bitcoins were first introduced in 2009, and are a decentralized digital currency. It is a peer-to-peer currency that is regulated by internet users worldwide, and is free from the meddling hands of central banks. A process called “mining”, which is done by computers solving very complex math problems, creates Bitcoins.
Because the problems are so complex, they require a huge amount of computing power and large power bills. This is done on purpose to limit the amount of mining that any one individual or company can do, which in turn limits the amounts of Bitcoins available. This helps control inflation and is used to protect the value of the currency.
You can learn more about what is involved in setting up a Bitcoin mine here.
If it sounds confusing, that is because it is. It is designed to be confusing, and this is actually a necessary trait if Bitcoins are going to remain stable.
It is not that much different from gold mining. It is easy to buy and sell gold, but to be able to pull it out of the ground is a different story. It takes big money to run a gold mine, and the same can be said for mining for Bitcoins.
What are the advantages?
There are a few advantages to getting into Bitcoins. The first is obviously that they may continue to rise in price. As you will see from the chart below, their value has been moving strongly higher over the last year, in particular since the start of the year. This would be great for investors if the value could continue to move higher, but looking at that chart would be enough to scare me from putting any money into them right now.
They prevent government meddling. For example, Bitcoins have gained popularity in Cyprus as of late, with people looking for somewhere other than banks to put their savings in order to avoid future taxes by the government on their savings accounts.
You can transfer money across borders with very little cost. You can buy Bitcoins in Euros, then convert them back into dollars, or vice-versa without having to pay huge exchange rates. There are also some mainstream sites, such as WordPress, which have begun accepting payments for services in Bitcoins.
They free you from any sort of government intervention. Its users regulate the Bitcoin market, and as a result governments do not have the power to step in and regulate their value. This is appealing to many people who have seen recent monetary easing programs devalue the money in their savings account.
What are the disadvantages?
The recent price surge could be a huge bubble. Once again, you will want to look at the chart included at the end of this article. Take a second to look at that chart, and ask yourself if you would to invest in a stock with a similar chart pattern. The answer is no. We are seeing extreme price fluctuations, which is reason enough to hold off until things get a little more stable.
The fact that it is peer-to-peer also opens the door for hackers. There have been multiple instances where hackers have managed to steal large amounts of Bitcoins. Following such actions, the currency gets devalued and prices drop significantly.
They have been associated with illegal activities. There was a website in Australia that was caught selling cocaine, heroin, and even guns accepting payments in Bitcoins. The anonymous nature of Bitcoins makes it very easy for such activities to occur, and if more of these incidents start to surface the currency will come under greater pressure from governments who view the currency as the perfect vehicle to launder money.
Online poker sites have also started to accept money from Bitcoins, which opens up even more potential problems for the currency since online poker is illegal in many places around the world, including for now the U.S.
The U.S. government is paying attention, and has been attaching money laundering laws to online currencies. The change will force any company that deals with Bitcoins to follow the same money laundering rules as Western Union (WU).
My opinion is that people should wait a while before getting into the Bitcoin game. There is the real possibility that this could be one big glamorized ponzi scheme, and the last people to get involved will be left with pennies on the dollar.
Because it is not regulated, I would definitely not put large amounts of money into Bitcoins at the current time. If their popularity continues to grow, and people continue to lose faith in the banking system, Bitcoins could be a good place to put your money in the future, but for now there are just too many unknowns for my liking.