Bitcoins and other Bizarre Investments
It’s been a volatile year for Bitcoin investors. On April 10, the Bitcoin market shot up to $266, before closing the day at around $125. The next day, Bitcoins started trading at $65. Today, they are trading around $121. The long-term value of a Bitcoin is anyone’s guess. It could be very valuable or completely worthless.
What in the World is a Bitcoin?
Bitcoins were created as an alternative to the world’s common currencies. The creator, Satoshi Nakamoto, considers Bitcoins to be a peer-to-peer electronic cash system. Since Bitcoins are based on cryptographic numbers, they can be transferred electronically. Unlike other global currencies, there is a limit of 21 Million Bitcoins that can be created. This is intended to combat inflation and make the value go up, unlike currencies that are printed at will. They can also be sent directly from one party to another, without the need for a banking intermediary.
So, Bitcoins are a digital and anonymous form of payment that is outside the reach of any government. What could possibly go wrong? Hackers have broken into the Bitcoin exchanges and stolen other people’s coins. Sometime an anonymous buyer will buy Bitcoins with a credit card and then reverse the charge, which means the seller is out their coins. Bitcoins have been used by unscrupulous people for nefarious purposes. I suspect governments will crack down on Bitcoin holders, since the central banks don’t want any competition.
Two Types of Investments
Precious, rare and vintage items can be great investments. They can also be big money losers. Collectibles can be hard to move at retail prices. They can incur a lot of transaction costs for auction and authentication. They can be damaged or devalued by wear or weather. They can go out of style and lose popularity, like baseball cards or comic books. The key thing about collectibles is that they must be sold for a higher price than they were purchased for in order to profit. They don’t generate any income while they are being held.
I like to invest in things that generate earnings. Companies generate earnings for stocks and stock mutual funds and often pay dividends. Bonds and CDs generate earnings from interest. Either way, investors don’t have to count completely on appreciation in order to make a profit. If the company grows, it’s stock usually goes up, in addition to any dividends they have paid out.
The Bottom Line
The bottom line is the value of any investment is only what someone else is willing to pay for it. It makes no difference whether it is a stock, a property, a collectible or an ounce of gold. Be wary of investments that are based on speculation.
“Speculation is only a word covering the making of money out of the manipulation of prices, instead of supplying goods and services.”
Henry Ford – Founder of Ford Motor Company
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“I like to invest in things that generate earnings. Companies generate earnings for stocks and stock mutual funds and often pay dividends. Bonds and CDs generate earnings from interest.”
Bonds and CDs don’t currently even keep up with inflation. So while you are “making a profit,” at least from the IRS point of view, you still are losing purchasing power.
Bitcoin isn’t a collectable. I recently participated in “Passing Bitcoin around the World.” Nine of us from as far away as India and New Zealand passed .5 bitcoins (~66 dollars) from one person to the next. Finally we sent the coin to The One Foundation in China, all .5 of the bitcoin. 11 transactions, 10 of them across international borders, a path nearly 70,000 miles long …. all in 1 hour 51 minutes and 45 seconds.
You can’t do that with the current financial networks. They are creaky old dinosaurs, just as slow, and horribly expensive. Doing the same thing with 66 literal dollars would have taken weeks, and cost hundreds of dollars!
Investing in a *technology* with provable and enormous advantages over the current system is still a risky bet. But it isn’t as risky as this article implies.
Thanks for stopping by Paul.
You are correct that some bonds, like Treasuries, and CDs earn less than the current rate of inflation. I agree and have posted it many times. But, there are corporate bonds with much better yields. I’m not a big bond fan, especially with interest rates set to rise.
I also think Bitcoins and similar technologies that allow bank-less transactions are cool and could help loosen the grip of the central banks on financial transactions. However, I still think it’s very risky and very volatile as an investment.
I’ve been intrigued by the Bitcoin phenomenon. I’m not sure whether Bitcoins will thrive or crash & burn, but I think some future iteration of the concept will be the status quo in a couple of decades.
It will be interesting to see. I am a big fan of new technologies and anything that disrupts the status quo. Without getting too political, I believe central banks have become way too powerful and are largely unaccountable, even to world governments. I’m a big fan of anything that can reduce their grip on the financial system. I definitely expect a backlash, especially when converting Bitcoins back into currencies.
As Paul says, Bitcoin, as a payment network, is pretty amazing. Pushing all the transactions ever made into the blockchain? Pretty ingenious, if a bit dangerous to the naive (no way to reverse the transaction!).
The biggest issue is transferring Bitcoin to your choice of currency – although, now anyway, there are ways to spend Bitcoins directly on goods and services.
I guess this is the real test for me. Investing in Bitcoins seems a lot like investing in Iraqi Dinar to me, not likely to pay off. However, if they ever do see widespread use for payments, then it would be a lot more like investing in PayPal.
I think bitcoins represent an idea that’s ahead of it’s time. At the moment, it just seems like an “investment” that’s too risky. I’m with you on this one!