Should You Get In On Bitcoins?

Bitcoin mania has rocked the finance world. Once the esoteric territory of techheads and shady dealers only, the digital currency has exploded onto the investment scene. This is partly due to quakes in real-world international finance, like Cyprus’ financial collapse sending citizens rushing to the bitcoin mines.

It moves in a peer-to-peer exchange only, relying on no financial institutions or government control, and there is a limit — 21 million bitcoins. No more will be available beyond that, which means there should never be a sudden cash flush that undercuts valuation. Bitcoins are not “made,” but “mined” and its growth rate moves slowly by design. So far, only a little over half of the world’s supply has been mined, with the last bitcoin projected to arrive in 2140.

When I wrote this post explaining what bitcoins are, the value was $78 USD. After the article posted, it jumped to $90 the same day. Within two weeks, they hit and then exceeded $200 a piece, ultimately cresting past $250. That certainly looks like one heck of a Bitcoin bubble. And that may have people wondering if they should hop on the bandwagon.

You might be able to get in on the action if you have a supercomputer to mine them, or a fairly advanced consumer terminal and an unbelievable load of patience. Or you could buy them from people who have already done the dirty work, and cross your fingers that the value will ride out the fluctuations and continue to rise. But should you? Here’s what some of the pundits are saying:

Recounting the nervewracking process of procuring bitcoins, Farhad Manjoo (Slate) wrote, “You’ve got to take several leaps of faith, trusting sites that look like they were put together by teenagers.” But ultimately, this may not be a bad thing. Bubbles happen when mainstream buyers swarm in on a particular commodity or investment, so this fringe element may just be the pre- (or mid-) bubble nature of things. As more investors flock to it, we’re likely to see more polished Bitcoin sites, indicating that the masses have arrived. That’s when “prices will begin to get really crazy.”

Like any bubble, will bitcoin valuations eventually pop? Well, that’s one way to look at it. But, as Henry Blodget (Business Insider) explains, speculators are actually “laughing at all the people who are dismissing Bitcoin as a bubble.” The only money you’re really risking is the money you put into it. But if you could make six times the amount of initial investment — as others have made in the last several weeks — the incredibly high potential rate of return can mitigate those fears. Of course, he hedges this by also writing that there’s always some risk due to unforeseen circumstances, like hacking or government crackdowns.

Timothy Lee (Forbes) has an interesting view. Instead of looking at it as just another form of currency, he sees it as a bonafide disruptive technology: “The Bitcoin economy today looks a lot like the PC market circa 1978. Most people today look at Bitcoin and see an impractical curiosity.” What he sees is a platform, one that has plenty of room to grow.

All of that sounds pretty good, but Kurt Eichenwald (Vanity Fair) remains skeptical. He says this system is “very cool. But also very foolish.” Currencies are based on “a rational expectation of relatively stable valuation,” but bitcoin prices are neither stable nor rational. This “market is a fantasy” based on speculators and investors. What happens when they stop buying? Who will step in to replace them? “My bet? No one.” 

So there you have it, some pros and cons. Here are a couple more considerations: Bitcoins traded around $15 back in January. At one point, It soared beyond $250. But it took a nasty hit today, plunging down to around $135 (as of this writing). Currently, it’s at 50 percent off its intraday high of $266. 

And although bitcoins have a reputation for being fairly unhackable — or at least no successful hacks have surfaced yet — the wallets that hold them are more vulnerable. Just ask Instawallet. 

The takeaway? Investing in bitcoins is not for the squeamish. Trying to get hold of one or two for curiosity’s sake is one thing, but creating a portfolio around it is another that requires nothing less than nerves of steel.