Should you invest in Bitcoins?

Published 31.08.2017 02:07
Updated 31.08.2017 02:25

Unless you've been living in a cave for the last few years, you've probably heard of Bitcoin. One Bitcoin was worth about $1,000 four months ago and is now worth $4,534.25 as of this writing. It was actually worth a fraction of a dollar at its inception but has only really been on the radar of the mainstream media for a few years. So whatever it is, it has gone up 300 plus percentage points in a few months. As with any stock or bond or currency that appreciates so quickly, I invariably get asked "do you recommend investing in..." So, do I recommend investing in Bitcoin? It's a little complicated...

For those who actually have been living in a cave, a quick refresher. Bitcoin calls itself "A Peer-to-Peer Electronic Cash System." Others call it an alternative currency. It's sometimes called a complementary currency and more specifically called a "cryptocurrency," it is like any other currency we know of yet is unlike any other. While many "cryptocurrencies" have popped up recently, Bitcoin is the most famous of these currencies and I'll talk about it as a proxy for the entire universe of cryptocurrencies. I'm not going to tell the story of its elusive founder Satoshi Nakamoto or other parts of Bitcoin lore. There have been countless articles published that have already done that. Let's cut to the chase here, is Bitcoin a good investment?

Without going into too much detail let me describe what Bitcoin is by describing how it's like cash. In the past cash, printed or coined money, was exchangeable for gold or silver or other precious metals. The U.S. dollar abandoned this practice in 1971. The U.S. dollar can be used to buy things because the people who have U.S, dollars believe it can be used to buy things. Imagine for a second if everyone in the world thought that the U.S. dollar or any other currency was worthless. In that case, dollars would be burned for fuel or heat probably and the coins melted for use elsewhere if it was even worth melting them. There are currencies like this all over the world. They end up as charm bracelets for little girls and boys or are used as coasters in hipster cafes.

The reason people believe the U.S. dollar can buy things is that most if not all commodities are dollar denominated. This means for one dollar, you can currently by a fraction of a barrel of oil, a fraction of a bushel of wheat, etc. As long as people believe they can buy something with a currency, it is worth something. Bitcoin's value will increase as more people sell things using Bitcoin and more people find its use more convenient. The primary lure of Bitcoin is its anonymity. While the average person can easily be identified when they use Bitcoin, if you spent enough time, you could anonymize yourself and your bitcoins. This is practically impossible with normal currencies. Even bearer bonds or numbered accounts require someone to show up somewhere to claim payment. Bitcoins don't require a physical presence.

Bitcoins are strings of numbers and letters. Every bitcoin transaction is noted in a ledger called a "blockchain." A "blockchain" is a chain of blocks of transactions that specify which Bitcoin wallet sent Bitcoins to another wallet, how much was sent, and when the transaction occurred. Every transaction is verified by the other members of the network, called Bitcoin miners or nodes. Miners are paid in Bitcoin for keeping this ledger. The ability to keep this ledger consumes computing power. Complex math problems need to be solved to verify transactions, thus the "crypto" in "cryptocurrency." In this way the system is virtually unhackable because it would be cost prohibitive to steal the bitcoins by falsifying the "blockchain." As the network expands, this will become even more true.

So a currency currently exists that allows users to nearly instantaneously transfer unlimited amount of funds anonymously with no fees. This same currency has appreciated from 1 cent to four thousand dollars in eight years. The problem is, Bitcoin is too good to be true. Even if it is true, those that stand the most to lose, banks and government regulators, will do whatever they can to kill it in its infancy. If they are successful Bitcoin will move underground (even further underground let's say) and it's appreciation will slow or stop. If they are unsuccessful, Bitcoin's biggest competitor will be other cryptocurrencies. I haven't invested in Bitcoin yet and believe the current risks outweigh the potential reward.

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