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Bitcoins As An Investment

Every day, more and more talk about Bitcoins is occurring, not only as a digital currency, but also as a financial investment.  Many people are intrigued by this digital currency, but they also have reservations about it as well.  For now we will discuss how to evaluate bitcoins as an investment.

There are Bitcoin exchanges, just as there are stock market exchanges.  As of December 2013, the largest full-trading Bitcoin exchanges that are available to everyone include Mt. Gox (based in Japan), Bitstamp (based in the United States), BTC-e (based in Bulgaria), and Kraken (based in the United States).  The world’s largest Bitcoin exchange, BTC China, is based in China, but that exchange only allows exchanges of bitcoins for Chinese Yuan/Renminbi.

In order to open an account with these exchanges, you usually have to link a bank account to your Bitcoin exchange account, as you need to wire transfer the money for bitcoins to use in your account.  Credit cards and PayPal are not options [at least not at the time of writing] because the transactions can be reversed very easily, whereas a wire transfer cannot be reversed.  

Usually, only bank accounts from that specific exchange’s home-based country can be linked to the exchange account (for example, CoinBase, based in the U.S., only allows U.S. bank accounts).

Like the financial stock markets, bitcoins fluctuate in value against real currencies such as the U.S. Dollar, the Euro, the Japanese Yen, and others.  One important distinction between Bitcoins and real currencies to this point in Bitcoin’s history is the fact that Bitcoin’s valuation has been much more volatile than real currencies.  

In December 2013, Bitcoin’s valuation went from about $675 down to about $425 within twelve hours, about a 37% drop in valuation.  That is virtually unheard of with any real currency (barring something major like The Great Depression or some other major economic event).  

The reason that this sharp drop in valuation took place is because the People’s Bank of China told third-party payment processors that they should have nothing more to do with Bitcoin exchanges.  As a result, Bitcoin kept getting cut off from being supplied by the payment processors; in fact, Bitcoin was cut off by three payment processors inside of a week.  Banks have also been told to not deal with Bitcoin any longer.  

This event reflects the major concern that most financial experts have about the currency.  Many feel it is too volatile as an investment, leading to sharp price spikes and declines that are virtually not seen in other currencies, the equity market, or mutual funds.  Most financial experts feel that the digital currency must stabilize in value and not be so prone to such rapid peaks and valleys for it to be taken more seriously as a solid investment.  

The problem that many financial experts and institutions have with Bitcoin is that not enough is known about how the currency is mined and how it is “regulated”, so that the currency stays on track of having 21 million bitcoins in the year 2140.  

While safeguards are in place to keep the currency on that path, there have been attempts to try to disrupt the network and give a few select bitcoin miners the ability to mine as many coins as they wish.  There has also been concern that a group of miners could combine together, and work toward their mutual benefit, and to the detriment of everyone else on the network. This would occur by harnessing their mining power to get more coins for themselves and leave little to the rest of the network.  

As you can see, there is still some question and doubt on how legitimate of a currency Bitcoin is, including its true valuation.  This is likely due to the fact that Bitcoin is the first digital currency, and financial experts are unsure of how to truly evaluate its worth.  

More and more companies are starting to accept it as payment, but not enough is known about the mining process and how it can maintain itself to fulfill the promise of 21 million bitcoins in the year 2140.  Plus, Bitcoin can be susceptible to wild value peaks and valleys whenever an event associated with the network takes place, such as when Chinese third-party payment processors and banks are told to not deal with Bitcoin exchanges.  

It will take more time and a longer track record for Bitcoin to establish the trust of the financial community to where Bitcoin can be seen as a solid investment for most investors.

BITCOIN SURFING