Bitcoins: Risks or Returns
Created by Satoshi Nakamoto in 2009, Bitcoins are a digital currency which some are using instead of money for various transactions. The good side is that Bitcoins are typically not taxable, immune to inflation, unregulated, and are not tied to any central bank, nation, or government.
Unfortunately that is where the benefits end.
As Bitcoins are not backed by anything tangible (such as gold or a country) they are actually only worth whatever someone else is willing to pay you for them. Games of “Hot Potato” are fun, as long as your aren’t the last one holding on.
The actual intrinsic or book value of a Bitcoin is zero. A single Bitcoin is simply one digit in a very complicated open-source computer algorithm, and typically the owner doesn’t get to actually hold the coin in their hand, let alone see it beyond the digit on their computer screen.
As you could expect, the untraceable nature of Bitcoins has led to rampant use in and for illicit activities, from hiring hit men to laundering drug money. The clandestine and unregulated nature of the alternative currency also exposes owners to losses due to theft – it is not clear what authority you would go to if your Bitcoins have been digitally stolen.
This was the case for more than 30 individuals recently, each of whom claim to have lost more than $1 million in value. Meanwhile, the highest-profile theft involved 96,000 of the coins, which at the time were worth more than $100 million.
One of the greatest advantages of using Bitcoins is their lack of regulation. Unfortunately for the alternative currency, this will change. The U.S. Senate’s Department of Homeland Security recently had a meeting to discuss if Bitcoin should be regulated, and to what degree. China also has blocked its banks from using the currency at all. Other countries will likely follow suit, and haven’t already only because Bitcoins are so new.
There is a limit to the total supply of Bitcoins. The advanced computer algorithm that controls the supply is hard-wired to only allow a total of 21 million units. With the limit to the total supply, any increase in demand can send the price higher.
In fact, we’ve seen exactly this play out during the currency’s meteoric rise from $13.50 one year ago to a recent high of $1,130. The value of Bitcoin currently sits at $693 as of the time of writing, but it can be extremely volatile and may be tens of percentages higher or lower a matter of hours from now.
In fact, the currency lost 50% in one day (dropping from $1,130 to $552) when the government of China issued a warning against the speculative nature of Bitcoins. Currently two-thirds of all activity in the digital currency takes place in China.
Some may consider it ironic that there are dozens of alternatives to this alternative currency. For example, Namecoin, Peercoin and Litecoin are among the numerous competitors to Bitcoin. Even if the usage and acceptance for all of them were combined, the concept of digital money still would not come close to common acceptance. A critical mass of vendors who accept the various versions of the coins would need to be reached before they could be a lasting phenomenon, and that critical mass would probably be upwards of 20% of all vendors. Currently, less than 0.1% of worldwide vendors accept payments in Bitcoins.
Similar to all previous fads, from the tulip bulb mania in 17th century Holland to the Occupy Wall Street protests to binary options, to a stock-picking robot, Bitcoins will fade away. The excitement of the digital currency is just now passing, and all that remains if for the entire idea to disappear from view, which will happen in a matter of months, rather than years.