Should You Jump on the Bitcoin Bandwagon?

Photo (cc) by Whitez

Dollar, euro, yen … bitcoin?

If the Bitcoin Foundation has its way, the virtual currency will eventually be on equal footing with the world’s other monetary heavyweights. It certainly seems plausible, too, when stories circulate on the Internet about how a $30 investment yielded nearly $900,000 in four short years.

Those of us who missed out on investing in Google, Amazon and Facebook during the early years may be wondering if we should jump on board the Bitcoin bandwagon or risk seeing the next big thing pass us by yet again.

We’ve got an answer for you, but first, let’s go over some Bitcoin background for the uninitiated.

The mysterious Mr. Satoshi Nakamoto

The origins of Bitcoin sound a little like a movie script, but I couldn’t make this up if I tried.

Back in 2008, Satoshi Nakamoto released a paper outlining the basics of Bitcoin, a peer-to-peer electronic cash system. It would be a system relying on digital signatures, network timestamps and trusted third parties rather than a centralized bank or government.

There is one small side note to the paper: Satoshi Nakamoto doesn’t exist. Despite some widespread speculation on the Internet, no one knows exactly who created Bitcoin. He, she or they launched the open source software program and then seemed to have quietly disappeared, although not before mining enough bitcoins to become a billionaire.

Mining for money

Yes, I did say Nakamoto went mining for bitcoins. In fact, with the right equipment and a lot of time, you can still go out and find your own bitcoins on the Web.

You see, the software that runs the system is set up to spit out a bitcoin to those who successfully complete algorithms to create new data blocks. In the early days, anyone with a laptop could run a program that would let them create blocks and mine several bitcoins each day. However, as the system has matured, the process of creating blocks has progressively gotten more difficult, to the point where people now need specialized machines and several days before they get a bitcoin.

While it takes longer, it’s also more rewarding. A year ago, a bitcoin may have been worth only $20. Today, a single bitcoin could fetch as much as $500 or $600, according to recent trading trends.

But is it actually currency?

Although the number of merchants accepting bitcoins has increased, some finance experts say the system works more like an investment than a currency.

While currencies may be subject to inflation and deflation, bitcoins have experienced wild swings in value that are more in line with what you would expect from a speculative investment. Just last week, the value of a bitcoin dropped about 30 percent when one of the major trading platforms halted withdrawals, citing a technical glitch in the system’s software.

It’s just the latest in a series of ups and downs for the cryptocurrency. At the start of 2013, the value of a bitcoin jumped dramatically, from about $20 to more than $250 in a two-month period. Then it took only a few hours in April for them to lose half their value.

Prices resumed their upward march but not without a few more hiccups. Bitcoins saw another nearly 30 percent drop in December when the Chinese government declared the digital currency has “no legal status or monetary equivalent.”

“The radical swings bitcoin pricing is taking means by definition it’s a speculative investment rather than a currency,” says Money Talks News money expert Stacy Johnson.

And it may not be a good investment, either. According to this handy comparison provided by Forbes, bitcoins may be following the classic bubble stages. That means we are currently in the mania phase, with investors being fearful and heading into despair.

Who should buy some bitcoins

Obviously, some people have made big bucks with bitcoins. The question is whether you should put some of your hard-earned cash in the currency as well.

Let’s start by dismissing the idea of using a bitcoin as a real currency. At this point, so few businesses accept bitcoins, there is no compelling reason to transfer your dollars for the coins if your only purpose is to be able to spend them.

That leaves us with buying bitcoins as an investment. For most of our readers, we say this is not a smart idea.

“Putting money into anything that volatile is gambling, not investing,” Johnson explains.

However, if you have plenty of money in the bank and don’t mind losing a little along the way, feel free to dabble in the bitcoin phenomenon.

“Bottom line: Only those who understand they’re speculating and have money to lose should put anything in Bitcoin,” Johnson says.

For everyone else, don’t be fooled by the hype. Keep your money safely in your bank account, 401(k) or IRA for now.

Do you have any bitcoins? Do you like the idea of a virtual currency that isn’t controlled by a bank or government? Join the conversation with other Money Talks News readers in the comments below or on our Facebook page.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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