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