4 Reasons Why Bitcoins are a Bad Investment
There is no arguing with the fact that bitcoins have increased exponentially in value since their debut. Regardless of their current value, it’s also clear that they carry a lot of risk. The MtGox $480 million hacker heist serves as evidence that it’s difficult to keep Bitcoins safe, not to mention it’s unclear exactly where they derive their value. Before buying up Bitcoins with your life savings, check out these 4 reasons to stay far, far away.
1. Bitcoins only have value as long people are willing to pay for them
Do you remember when Pokémon cards were big? Or perhaps Beanie Babies? Just like these fads, Bitcoin has a perceived value that was built on hype and perceived scarcity. Bitcoins don’t return any interest, so they are dead as an interest bearing investment. That said, they still have speculative value to many based on the possibility that their value will rise. What can make their value rise? More demand.
It is generally excepted that currency fluctuations are a function of international trade, interest rates, and money supply (printing). When people of one country, say Germany, want to buy things in the United States, they have to convert their Euros to US Dollars, effectively selling Euros and buying US Dollars. If countries using the Euro start demanding more US goods and the US demands the same amount of European goods as before, the Dollar will rise in value compared to the Euro. In regards to Bitcoin, there is only a small pool of things you can actually buy with them such as online games, so it’s doubtful that goods exclusively available to people with Bitcoins are driving demand.
In addition to online games, new research from PriceSpy.co.uk found that 1 in 20 Bitcoin holders had used Bitcoins to buy drugs. While this survey may not be indicative of the whole Bitcoin using population, illegal drugs may be driving demand for Bitcoins.
Because Bitcoins don’t pay interest and the money supply is fixed (more Bitcoins cannot be printed), demand cannot come from either of these factors. Arguably the only thing that is better to purchase with Bitcoins rather than typical currency is illegal drugs. I don’t know about you but I wouldn’t want the value of my investment to be based on the ebb and flow of illegal drug supply/demand.
2. The value of Bitcoins fluctuate too much for comfort
Would you want to make an “investment” that could fall from $10,000 to $5,000 in a matter of weeks? Well that is what your signing up for if you buy Bitcoins. Not only do they return no interest and have very limited uses, but they have a value that is completely unpredictable and based on what seems to be the whims of the masses. At the beginning of February Bitcoins were trading at over $800/Bitcoin; now they are trading at less than $500/Bitcoin. That’s a loss of over 35%! When I lose money on an investment I like to know why. If I bought a stock and they then reported poor earnings expectations for the next year, I can see right in front of me why the value of my investment has gone down. The forces of demand that drive Bitcoin are founded in speculation, so the only rhyme or reason to the fluctuation in the value of a Bitcoin is the prospect of more people wanting to either buy or sell them.
3. Bitcoin is the currency of the future
What hole have you been living in? In order for Bitcoin to be a viable currency, at least a few things would need to happen:
There would need to be reasonable assurance that your Bitcoins would not be stolen
There would need to be a reason to hold onto Bitcoins like the ability to buy Bitcoin denominated bonds so you could earn interest (speculation is not reason enough)
The value of Bitcoin would need to be stable
While goods in the US have to be bought with US Dollars, there are very few goods that must be bought with Bitcoins. There is no conceivable scenario in which Bitcoins would gain the demand necessary to increase circulation enough to make them stable. As a currency, they are extremely unsafe and really only worth holding onto if you want to buy illegal drugs. On top of this, there would need to be enough money made by Bitcoin brokers who hold onto your bitcoins for you to allow them to establish bank level security. If you think that’s going to happen within the next 100 years then you need to quit using the drugs you bought with the Bitcoins you mined.