Currency trading has always been a viable and lucrative way to invest. It’s generally safe, particularly when you’re trading with relatively stable currencies, such as the Yen, Pesos or Euros, and can lead you to a neat hobby like collecting foreign money. Currency trading has taken an interesting turn lately, though, that has some investors excited and some cautious. The new currency that has everyone talking is called “Bitcoin,” a form of internet currency that is decentralized and can be traded for any major currency being used today. It has all the apparent hallmarks of a great beginning to the ideal of a worldwide currency, but there are a handful of issues that should make any potential investor think twice before they jump in.
The rarity of bitcoin is artificial - since there are supposedly only 21 million in the internet ready to be “mined,” or which are in circulation now. Additionally, they are supposedly more difficult to find as more are found. Apparently, the 21 millionth coin will be nearly impossible to obtain. It is this scarcity, combined with the difficulty in obtaining the Bitcoins that has led to astronomical increases in their valuation, from only about a dollar a few years ago, to nearly $600 just a few days ago. The problem is that Bitcoins aren’t backed by anything but their scarcity. Do you know the problem with this? Remember “Beanie Babies?” They had relative scarcity as well. The same can be said for baseball cards, “Pogs,” and any of a hundred other fads that have come and gone in the last two decades. The difference is that Bitcoins are intended to be collected as a form of payment, rather than as a fun hobby.
“Mining” for Bitcoins
Supposedly, there are 21 million Bitcoins “scattered” around the internet. Initially, they were relatively easy to find, but today, it’s much more complicated to find them. You might think that this term “mining” for Bitcoins implies that they’re free if you simply put in a little work, but this simply isn’t the case. The algorithms that are mined are now so complicated that advanced computers are required to handle the work. No, your 10-year-old desktop with a flickering screen isn’t going to cut it. The equipment that is produced for this task, which is advertised around the internet, costs thousands of dollars today, and is complicated to set up and operate. No novice in computing could even come close to turning a profit.
One of the biggest hurdles that Bitcoin has to contend with is the relatively slow adaptation of the form of payment among traditional resellers. There are a few merchants that take them as a form of payment, but certainly nowhere near the number that now accept Paypal as a form of payment. It remains to be seen whether merchants embrace this new currency, or simply avoid it all together.
The Criminal Connection
Unfortunately, Bitcoin’s major benefits also act in a very real way as a drawback. The anonymity afforded to users of this form of payment make it as good as using cash, and that’s one of the things about it that draws a criminal element. The black market website “Silk Road” for example, accepted Bitcoin as a form of payment for such things as drugs and hit men. This layer of anonymity allowed criminals to break the law and endanger the lives of others with impunity.
In conclusion, it may be tempting to try to jump on the Bitcoin bandwagon, particularly since it seems as though the price is just going up and up. The problem is that the electronic currency might just not be as great as some tech lovers seem to think it is. The opportunities for fraud are immense, and it would only take one crashed computer for you to lose a bundle with no recourse whatsoever to recover your investment. Additionally, the current going price appears to be far too high. Like the “Dot-Com boom” of just a few years ago, it seems that this currency is currently inflated because it’s popular and the “next new thing.” Smart investors would be wise, though, to tread very, very carefully, knowing that once (and if) the currency is established permanently, the price will quickly drop to a much more reasonable level. It’s simply unrealistic to believe that any investment will only rise as time passes. Tread VERY carefully, and consult your financial advisor before making any rash decisions with large sums of your nest egg involved!