Invest in bitcoins?
I had some people ask me about bitcoins as an investment, that I had to do some research over what I already knew about bitcoins. I was and am amazed at the amount of information and literature about the subject, which included, of course, a lot of hype promoting bitcoins. As a student and professional in economics and finance, I had to sort out the volume of information and focus on what mattered in economics, finance, and investments.
Bitcoins were invented or created in January 2009 by computer software experts as a digital currency arising from a complicated software that will create and regulate the volume and amount of the currency. By agreement among the creators, this currency will be acceptable among themselves and convertible to other currencies. So, it started as a "peer to peer" currency acceptable to within the group. Since the creation of additional bitcoins is complicated and difficult, and the formula for the creation sets a diminishing additional volume, the demand exceeded the available supply raising the price of bitcoins in dollars higher. It had become a digital commodity with a value that will rise and fall depending on demand. For some time, the dollar value was going up until someone created more bitcoins by manipulating the creator software. These bogus bitcoins were later deleted/demonetized to avoid the collapse of the price in dollars.
Is bitcoin really a currency? Currencies have to have three basic characteristics: it is a store of value, it is a medium of exchange, and it is a mode of payment. Bitcoins have no intrinsic value as it has no precious metal backing and no government backing. The price volatility of bitcoins which is 20 times that of the dollar, euro, or the pound does not make it a solid store of value. It is a medium of exchange since it is convertible to other currencies, but not in many countries as central banks all over the world are still very wary of bitcoins, and have not accepted its convertibility. It is accepted as a mode of payment by over 100,000 merchants all over the world as of 2016, but these are not much if you consider the millions of merchants worldwide. So, to me bitcoin is more of a commodity than a currency. It would be in the same league as gold, pork bellies, silver, or frozen orange juice which you never really see or take delivery when you trade on them. The financial trading volume of these commodities far exceeds the real physical volume but it hedges the prices of the physical commodities and makes speculators earn or lose money.
Over and above the guarded recognition of central banks, governments, and major financial institutions of bitcoins, the lack of regulatory mechanism which is touted as an advantage of bitcoins is also unnerving to some investors. The creation and trading mechanism of bitcoins is quite complicated to understand for an ordinary investor. Then there is the entry of crypto-robot software that is used in the real-time trading of bitcoins, and the entry of the big-time speculators in the bitcoin trading which can unfairly influence the market. This is not a market for small guys with limited resources.
The limited success of bitcoins has spurred new copycat crypto-currencies that may be detrimental to bitcoins as these will diminish valuations, as some of them will be more volatile and lose value. While I would not consider bitcoin investing as a pyramiding scheme as alleged by some critics, it is a kind of high-stakes gambling that should be avoided unless you have money to burn.
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