10

In Germany, crypto-currencies like Bitcoin are all over the news lately, making me aware of the fact I don't know much about them.

A journalistic TV program I was watching yesterday even claimed crypto-currencies are a real investment option... but I'm not so sure about that.

On one hand, I've been reading that across the ocean (USA and Canada), first ATMs have been setup that handle crypto-currencies.

On the other hand, I can not find any information if any crypto-currency is regulated (or even accepted) like common currencies (US dollar, Euro, Yen, etc.) are.

Can crypto-currencies really be regarded as a solid/conservative investment option like with regular currencies, or do I have to think of crypto-currencies like investing in "pork bellies" where risk tends to outrule chance, or are crypto-currencies more like fantasy-football and nothing one would/should seriously consider when it comes to planning an investment strategy?

Where exactly do I categorize crypto-currencies?

12

Forex. I will employ my skill for "suspension of disbelief" and answer with no visceral reaction to Bitcoin itself.

The Euro is not an 'investment.' It's a currency. People trade currencies in order to capture relative movements between pairs of currencies. Unlike stocks, that have an underlying business and potential for growth (or failure, of course) a currency trade is a zero sum game, two people on opposite sides of a bet.

Bitcoin has no underlying asset either, no stock, no commodity. It trades, de facto, like a currency, and for purposes of objective classification, it would be considered a currency, and held similar to any Forex position.

  • 2
    This is true, but clearly different real currencies have different levels of risk, so "any Forex position" is a bit broad. I think it's safe to say that buying bitcoins is not like buying US dollars, euros, yen, etc.; it's probably more like buying the Brazilian real at best, if not the South Sudanese pound. – BrenBarn Mar 8 '14 at 19:37
  • 4
    Yes, broad. I was trying to remain objective and assume a maturity to BitCoin so that it was less "fantasy football" and more "the Esperanto of currencies." – JoeTaxpayer Mar 8 '14 at 20:13
  • What have you got against fantasy football? :) p.s. Up here, hockey pools are the rage. – Chris W. Rea Mar 10 '14 at 23:23
  • There's one critical difference: BitCoin is deflationary by design, while the EUR is inflationary by design, and the USD and Yen are inflationary in practice. In a normal market that should be balanced by an interest rate difference but that seems to be a bit troubled at the moment. – MSalters Mar 12 '14 at 11:11
  • 1
    @MSalters - that's a difference that doesn't matter in the context of this question. – JoeTaxpayer Jan 24 '15 at 17:31
1

Decentralisation

The difficulty with "crypto currency" is that there is not a lot that is like it already. Most systems generally rely on a central issuer that controls it, such as government backed currency, or even private 'currencies' such as air miles points, or credit card points.

With Bitcoin, it is a decentralised network which while operating will continue to issue currency by itself, rewarding those who perform the difficult job of cryptographically signing the blocks.

Intrinsic Value

While air miles have an intrinsic value - you should be able to purchase flights with them as long as the issuer remains solvent; gold has industrial uses - e.g for making electrodes; and currency can be used to purchase anything in a given country; Bitcoin's value is limited - mainly what other people are willing to pay for it. While Bitcoin remains popular, the value should remain high and increase. However, if Bitcoin goes out of fashion, the value could drop to zero.

Perhaps there is some value in that holding a Bitcoin entitles you to use the Bitcoin network to transfer the value of that Bitcoin to someone else in the Bitcoin network, but with the current transaction processing times and fees, it may be easier to use something else to transfer money.

Is Bitcoin an 'Investment'

A Bitcoin is almost the definition of a pure speculation - mainly due to its limited intrinsic value. It's price is purely dependent on what people are willing to buy it at combined with the ever-reducing supply. Perhaps it might be better described as a bet on (or index) of Bitcoin's popularity.

There are many places where you can put money that will actually improve the world. With Bitcoin, you are simply tying up capital, with the hope that someone will be willing to pay more for it later. While this is similar to 'investing' in gold, it is not the same as investing in a company.

When I see the financial media talking about people 'investing' in Bitcoin, it makes me cringe. While technically it could tenuously be regarded as an investment, is it a good investment? Would you invest the same amount in gold... or palladium.. or other exotic precious metals. Bear in mind that these metals have more intrinsic value than Bitcoin.

Disclaimer

I hold Bitcoin, have mined some, etc. It is valuable now, but could be less valuable tomorrow. Don't invest if you can't afford to lose the money you put into it.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.