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Should You Invest In Bitcoins?

BitcoinBitcoins have been the rage for the past few 2 years as the value of a Bitcoin skyrocketed from just cents to a peak of US$1,200 in early December before falling back below the $800 mark. Given their newness, novelty and volatility, Bitcoins have passionate fans — and critics. Thus, many people are curious on whether this new crypto-currency actually stand a chance of becoming a viable investment option. We break it down into its pros and cons below.

Benefits

  • Limited Supply of 21 million units: Created by a person or group going by the name of Satoshi Nakamoto, the system is designed such that the total number of bitcoins will not exceed 21 million. Today, there are 12.185 million bitcoins in circulation. However, the Bitcoin algorithm mimics dwindling gold or other precious metal resources and the algorithm slows coin issuance by half every four years. Thus, as the supply of a bitcoin becomes increasingly difficult to acquire, the price of the existing bitcoins will go up if demand continues to rise.
  • Low Fees: Bitcoin is a digital currency that is designed for global commerce in the modern age, with the ease of a credit card but without the high fees.
  • Secure: All newly mined Bitcoins, along with every transaction, are publicly recorded and verified through the network. This record is known as the Blockchain and is one of the features that helps keep the system secure from fraud and abuse. Bitcoins cannot be duplicated or forged.
  • Increasing Acceptance: Many merchants have agreed to accept bitcoins to date and that includes Zynga Inc, which announced on 06 Jan 2014 that it will start accepting the virtual currency for some of its online social games, citing wider use of the digital money.

Risks

  • Volatile: The price of a bitcoin have soared from mere pennies to over US$1,000 in just a few years, following by plummeting prices to US$450 when news that China banks were prohibited from dealing with bitcoins was released. Some would even describe bitcoins as a bubble. Bitcoin investing can be volatile, and an investor investing at the high of US$1,000 and sold at US$450 would have seen more than 50% of his investment wiped out.
  • Central Banks voiced concerns/bans of usage: Central bank officials from a number of regulators world-wide have voiced concerns about the potential for money laundering and speculative trading. In recent news, Malaysia’s central bank became the latest central bank to disapprove of using Bitcoin as a legal, and warned about the risks of Bitcoin usage.
  • Infancy Stage: Despite hitting an all-time high of US$1k+, Bitcoin usage is still in its infancy stage. As Bitcoins are not created by or traded through any authorized central registry or agency, it is highly susceptible to fraud or manipulation. There have already been news of hackers disseminating malware to hack into computers in order to illegally mine Bitcoins illegal Bitcoins and this will likely increase in tandem with the rising popularity of the crypto-currency.

Foolish Bottomline

In the minds of some retail investors, Bitcoins are often compared to gold or a lottery ticket due to its large potential payoff. However, it is not prudent to adopt such an “all or nothing” approach. One way to invest in Bitcoins instead of buying Bitcoins would be to follow Li Ka-shing’s lead and buy into the firms providing the services that Bitcoin holders use. John Greenwood, the chief economist who designed Hong Kong’s pegged currency regime  said “Just like investors in days gone by made more money out of selling shovels and picks to gold-diggers than anyone ever made out of the gold mine, he is investing in the peripheral activity that Bitcoin has generated”.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.   Motley Fool Singapore contributor James Yeo doesn’t own shares in the companies mentioned.

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