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Bitcoin: Investment or Speculation?

by Miranda Marquit

One of the trends picking up steam right now is bitcoin. Recently, the value of a bitcoin has reached the $1,000 mark on the exchanges that allow you to buy bitcoins with more traditional currencies. With interest in bitcoin growing, it’s time to ask yourself: Is this an investment, or is it speculation?

What is Bitcoin?

Bitcoin investment or speculation?

Are Bitcoins a good investment?

Bitcoin is a digital currency. It’s an alternative to government-issued paper currency, and it’s also an alternative to precious metals. It’s accepted all over the world as payment, and there are no transaction fees involved with exchange bitcoins for products and services. There are also exchanges that facilitate conversions between bitcoins and other currencies.

First of all, it’s important to note that, while you can order novelty coins that represent bitcoins, the currency is not tangible. It’s entirely digital. You have to download a wallet app, and manage your bitcoins yourself. It’s worth noting that you also have to back up your bitcoin wallet, because if something happens to your computer and your wallet is erased all your bitcoins go with it. If you are going to get serious about bitcoin, you also need to be serious about backing up your wallet regularly.

Bitcoins are created out of computer processing power via a method called mining. If you are into mining, you are assigned fractions of bitcoins for your help in lending computer processing power. The creators of bitcoin insist that there will be a limited supply of bitcoins, so it is assumed that, at some point, the mining process will be stopped. (Unless they change their mind.)

There is no official backing agency for bitcoins. They are backed by the fact that some people will accept them in payment for goods and services, and by the fact that there are people willing to exchange their own money for bitcoins. It’s a de-centralized currency that is global. However, since the value of a bitcoin is rising, there are already bitcoin millionaires, and there is interest by some in getting in now, since bitcoin is starting to be classed — by some — as a safe haven on the order of gold.

Should You Invest in Bitcoin?

There are those that think that bitcoin is an up and coming investment. Get in now, and you are likely to make it rich later. Indeed, if you had been willing to buy a bitcoin back when you could do so for less than $200 on an exchange, you would be able to sell it for a handsome return.

On the other hand, there are those that think that bitcoin has more of the ring of speculation. The explosive growth of bitcoin has some questioning its staying power once the hype of the trend wears off. Another consideration is what happens if bitcoin isn’t adopted very widely? There are rumors that PayPal is thinking about using bitcoins as a payment option, which could go a long way toward wider adoption. Shopify has already added support for bitcoins.

However, even if bitcoin does become an accepted mainstream payment option, there is still the chance that it is more of a speculative investment than a value investment — especially right now, as the relative value of bitcoin continues to climb at a rapid pace. Some think that bitcoin could be approaching bubble territory, and that could mean a nasty burst for those who are just getting in now (early adopters who cash out before the burst would be in good shape).

What do you think of bitcoin? Do you see it as a viable payment option? An investment? Or is it mere speculation?

Photo credit: BTC Keychain


Published or updated December 2, 2013.
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{ 2 comments… read them below or add one }

1 snarkfinance

I am not sure I still fully understand what drives value up in Bitcoin… it isn’t currently scarcity, and it isn’t a service or product… just the fact people are willing to pay more for Bitcoins on the merit of an increase in value in the future. Sounds like speculation to me.

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2 Jonathan Cowan @ Pensas.co

Hi Miranda,

To add to your points well made the value of Bitcoin is in a huge speculative bubble. If you look at a graph of it’s performance since inception it’s identical to every major bubble in history. So getting in now to ‘get rich quick’ probably isn’t a good idea. However, when the bubble does burst that could be the time to look at it as a very very long term investment. The technology is revolutionary and could change the way finance is transacted globally. Equally important is that if it does gain traction it has a built in mechanism which cuts off supply by 2140. Therefore it could be a form of ‘digital gold’ in the future.

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