In a sentence: Bitcoin is a new currency of virtual coins that are limited in number and can easily be traded in a decentralized internet marketplace.
Obviously the concept of Bitcoin is to be used as a medium for commerce, but to a person everyone I have talked to about Bitcoin has been extremely skeptical.
When I started looking into Bitcoin seriously in January/February of this year, Bitcoin’s exchange to the dollar was headed from about $.60 to $1, already high volatility. But now 4 or 5 months later it is up to $7 to $8.
Half seriously in January we attempted to buy some Bitcoin but it was too much trouble and they were sold out. Looking now, was not buying Bitcoin a huge mistake? Theoretically, in opportunity cost on paper we have already lost a lot of money by not buying when we first heard about it.
When I analyzed Bitcoin in February I came to the following conclusions:
- Bitcoin is based on a piece of software, the marketplace and transaction hub for Bitcoins. Even though this software is open source and decentralized, it may have bugs or vulnerabilities that have yet to be considered fully or even found.
- Fixed supply commodities have volatile prices. Part of the reason for governments switching away from a commodity backed currency is that these standards are subject to random whims of the market. (Silver up 100% in 1 year)
- Trading with Bitcoin will have a lot of resistance until it becomes mainstream, a chicken and egg problem. Trying to actually buy and using Bitcoins, it’s definitely doable, but akin to setting up desktop Linux, it’s just enough of a hassle for a small benefit that it’s not a good sell for ‘normal people’.
- Bitcoin has absolutely no intrinsic value and no backing whatsoever. Gold and diamonds are shiny, and have brand value at the very least.
This is not to say that it wouldn’t be great if Bitcoin were to take off. Currency and monetary trading today is an entrenched system that is hostile to innovation. Bitcoin’s wide adoption could trigger a www or app store style innovation boom in the money space. A lot of fields could benefit: Micro-loans in poor countries, tips to bloggers, in app purchases, easy funding and purchasing for small businesses and indie developers.
So buy Bitcoin now? Not to advocate too strongly for it, but definitely buy Bitcoin if you want to help the movement, or at least talk about Bitcoin: awareness of Bitcoin as a currency will actually increase its chances of becoming a currency. This is a big reason the value of a coin has gone up over 10x in the past year: people are talking about it.
Buy it as an investment? No. As a gamble? Yes. Bitcoin is a zero sum game, it’s not like a company’s stock where money can be created from nothing given innovation and hard work. It’s a commodities market, not a stock market.
The relevant questions:
- Are people undervaluing Bitcoins?
- Are people likely to overvalue Bitcoins in the future?
Not to prognosticate, but Bitcoin by itself is a very intriguing idea and piece of technology that probably deserves mainstream attention. In the future it is likely to be over-valued on that basis alone.
I’m not going to buy myself as I don’t have so much money I feel like I can gamble it, but I would say yes it’s a good gamble if you do: it will probably rise in price when it gets mainstream attention, at which point you can sell for a profit.
Use Bitcoin for actual commerce? Not yet, unless you are prepared to change your prices frequently and only keep limited amounts of Bitcoin on hand, or you don’t care about the risks. Bitcoin is too volatile, there are too few players, it still is a hassle to integrate, and it is risky at this point in its life-cycle.