Bitcoins are a virtual currency that was developed in 2009. Users would set up their computers to solve complex mathematical algorithms to ‘mine’ Bitcoins. In the early days since its launch 7 years ago it was much easier to mine the coins and one early adopter managed to gain 7,500 Bitcoins in a single week.
At their peak value 7,500 Bitcoins would be worth approximately $8 million AUD, however when spring cleaning his house, this poor soul threw out his hard disk containing the bitcoins along with the key to use them. So there is a garbage tip in the UK that could make someone a millionaire if they find it one day, if it’s not completely destroyed.
This highlights one of the flaws of Bitcoins. It is possible to have some type of hardware failure, where you can lose all your coins if you don’t have sufficient backups.
What makes Bitcoin different from standard currency?
Bitcoins are infinitely divisible, and there are a finite number of coins. Once all Bitcoins have been mined there will never be any more in existence. As seen in the example above of the lost coins, this can also drive down the supply which will increase demand for the remaining coins.
Controversy around Bitcoins.
Bitcoins gained notoriety with it being heavily associated with the online drug trade ring known as ‘Silk Road’. Because it is seen as a currency which can be used anonymously it is highly attractive to money launderers and traffickers which has tarnished the name somewhat and damaged its chances of becoming more mainstream. Governments have also set their sights on the virtual currency with legislation against Bitcoin. Russia and China are two countries that have taken a more negative stance against Bitcoins, and many others are looking at ways to tax it like any other commodity.
Despite this, Bitcoins have been somewhat mercurial in value, subject to skyrocketing to amazing highs, whilst also maintaining some short term instability and risk. This makes them a high risk / high upside investment. In January 2013, Bitcoins could be bought at under $15 per coin, however by the November 2013 they had reached a price of $1075!
Bottom line – should you view Bitcoins as an opportunity to invest?
The answer to this question is both yes and no. Wherever there is an opportunity for rapid gains, or long term gains, it would be silly to not at least consider the potential returns on your investment.
However, due to some implied risk/uncertainty with fluctuating prices and unknown future government actions against Bitcoin use, it also makes sense not to put all your eggs into one basket, to protect yourself against the risk of a downfall.