Bitcoins – Investment or Bust?

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By: David Emery CFP, CDFA™

November 30, 2013 Currencies

Bitcoins – Investment or Bust?

There has been a lot of media attention lately about the alternative currency known as Bitcoins. There was the story about the person who traded in his computer for a newer model and later realized (too late, as it turned out) his hard drive contained $7.5 million worth of Bitcoin currency in an encrypted “wallet”.  Or the recent heist of Bitcoins with an estimated value of over $100 million from an illegal online drug sales website whose ripped-off drug lord customers are the kind of folks not averse to having people killed with far less provocation.  Or the news that Silk Road, a prominent Bitcoin marketplace, was shut down by the FBI a few weeks ago because, thanks to the anonymity of Bitcoin currency, it had managed to do an estimated $1.2 billion in virtually untraceable sales of heroin, ecstasy, cocaine, firearms and computer hacking services to prominent members of the criminal underground.

Bitcoins are a relatively new digital currency.  The coins are, of course, not coins at all.  Essentially, they are records in a digital archive stored on servers throughout the web in the form of digital signatures, timestamps, and wallets.  Because a Bitcoin transaction doesn’t involve banking or transaction fees, some economists think they represent an early version of what all currencies might look like in the future. 

Libertarians and drug dealers like Bitcoins because they allow you to buy and sell without the government’s ability to assess tax or track the activity.  People who are suspicious of central bank policies like them because Bitcoins are not tied to any traditional banking system.  The total number of Bitcoins that will ever be in circulation is fixed at 21 million (estimated to happen in the year 2140), and no government can print more of them.

When they were introduced in 2009, Bitcoins were often given away as cheap curiosities, but the conversion price to dollars rose to above $1,200 per Bitcoin this year.  So are Bitcoins a good potential alternative investment?

The answer is almost certainly no, for a variety of reasons.  First, there is the volatility.  Earlier this month, Bitcoins suddenly lost more than half their value on news that the Chinese central bank would not allow Chinese citizens to use them as legal tender. 

Second, what can you buy with Bitcoins?  There are lists of businesses that will accept Bitcoins, but they are not mainstream.  Try holiday shopping with Bitcoins, online or elsewhere, and you’ll quickly discover your options are limited – unless your holiday spirit involves porn, narcotics or gambling stakes.