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The Bizarre World of Bitcoin Speculation: Should you Invest?

There has been lots of buzz and gossip about the Bitcoin. But what does it mean for you? Here’s an analysis of whether you should invest.

Screen Shot 2013-07-17 at 11.26.38 PMThis column concerns a hacker, a McDonald’s napkin, a coinage that looks like something you’d use to operate the skee ball machine at Dave & Busters and an economic meltdown in Cyprus. Many of these details we can verify; some we can’t. But this much we know: The cryptic little currency at the middle of it all, the Bitcoin, is either the most clever monetary revolution of the 21st Century, or the overhyped (and shady) equivalent of the Dutch Tulip Bubble of 1637.

Confused? Read on. It won’t cost you a single Bitcoin.

Everyone, it seems, wants to get into the Bitcoin act: not just investors, speculators and foreign exchange mavens, but also hackers (trying to manipulate the currency’s value), along with thieves, drug dealers and anyone trying to hide their illegal money-making activities. This because Bitcoins are nearly impossible to trace. This piece from London’s Daily Mail, published a week ago, tells of how a South Carolina man was busted in April and relieved of his 11.02 Bitcoins, then worth $814, by the Drug Enforcement Administration.

As for the Bitcoin itself, it’s a decentralized digital currency. That means no government backs it, nor any central bank. It’s based on an open-source, peer-to-peer Internet protocol. And of recent, their value has gone through the roof — and through the floor. During a four-week period in the spring, Bitcoins quadrupled in value. Then on April 10, 2013, the value of a single Bitcoin plummeted from a high of $266 to a low of $105. It ended the day at $145, but still up 1000 percent over the last three months. Can you say “roller coaster”?

To be sure, the currency has an occluded history. It’s the invention of a cryptographic expert who goes by the pseudonym Satoshi Nakamoto. According to cyber legend, he’s actually a hacker, and invented the Bitcoin in 2009 after he sold a vintage McDonald’s paper napkin online and the buyer defrauded him out of several thousand dollars. (Hmmmmm. As e-myths go, I’m lovin’ it.)

According to this calculator on Mashable.com, a Bitcoin at present is worth about $99.41. But before you start dreaming of the killing you can make on the Bitcoin market, keep in mind that this spring’s volatility was likely the result of a very nasty bubble.

On Slate, Farhad Manjoo writes, “Partly due to its growing legitimacy as a currency but mainly because of speculators like me, the value of Bitcoin is entering a bubble phase — its exchange rate with real-world currencies is hiking up at an incredible, likely unsustainable pace.” Part of the speculation was fueled by Europeans who, following the Cyprus bank crisis, turned to Bitcoins as an alternative to the euro and other currencies manipulated by central bankers.

You can invest in it, of course — but it turns out you can also buy stuff with it, at  merchants who take Bitcoins, such as BTCZone.com. At that website, a 13-inch Apple MacBook Pro costs 10.3227 Bitcoins, or about $1027 at present.

Still, it may be a long time before the Bitcoin catches up to any government currency in popularity or stability, as there’s lots to scare off everyday consumers. CNET reports that nearly a quarter of a million dollars was stolen in a virtual Bitcoin heist last year, while a hack at Instawallet forced the Bitcoin wallet company to suspend its service indefinitely.

And there’s more to landing a Bitcoin than walking over to the bank and making a withdrawal. As Manjoo describes it in his Slate piece, buying Bitcoins involves a multi-step process where an out-of-state wire transfer goes to a company that acts as an intermediary with an online Bitcoin exchange. Manjoo made his transfer to LocalTill, which he describes like this: “It’s something like PayPal, except LocalTill isn’t tied to your bank account or credit card, and instead deals only in cash.” And by the way, the LocalTill website looks like something designed by a 10 year old, or a fraudster.

So are there Bitcoins in your future? At least in Silicon Valley, there’s already a rush of startups offering Bitcoin-related services. But it’s hard to wrap one’s head around the notion that a currency without a bank, a nation, or even a creator who’s willing to show himself makes for a sound investment. But if you’re a drug kingpin trying to hide your cash, hey: It’s definitely worth a look.

What do you think about the Bitcoin?

About Lou Carlozo

Based in Chicago, Lou Carlozo is a personal finance contributor for Reuters Money, a columnist with DealNews.com, and a former managing editor at AOL's WalletPop.com. Contact him with story ideas for Money Under 30 at feedbacker@aol.com, or follow him via LinkedIn and Twitter (@LouCarlozo63).

Comments

  1. Bitcoins have become very popular. There are a few misconceptions out there however. First would be that Bitcoins are untraceable in fact Bitcoins are completely open and every transaction is made public and shared across the peer-2-peer network. What this means is if you are a ‘drug kingpin’ you should definitely look for other places to store your money.

    Bitcoins use public key cryptography at their core and encourage research in the security field. Which has made some amazing leaps forward.

    As far as investing in Bitcoins please do your homework and read the Bitcoin wiki. If you can’t setup your own bitcoin client on your computer from the source code you should probably look into other investment vehicles.

  2. Honestly the more I read about Bitcoins the more confused I get. I wouldnt invest in this as I know nothing about it and still just dont understand the craze behind it.

  3. A good point to note is that there is currently a start-up (don’t remember the name) that will be installing “Bitcoin ATMs” in hundreds, maybe thousands of locations across the U.S. You just put your USD in and it spits out a receipt with a QR code that you scan with your phone and it moves the Bitcoins into your digital wallet.