Bitcoin is hot, and it’s a hedge, but its value can collapse spil swift spil it rises
By Dana Blankenhorn, InvestorPlace Contributor
The greatest investment te the world today doesn&rsquo,t exist. It&rsquo,s bitcoin.
A bitcoin is basically an encryption key, kept te the ledger of a trader. Ownership of the encryption key entitles you to trade it for goods, services, or other types of cryptocurrency, with names like Ethereum, Ripple and Litecoin.
There are, te fact, 1300-plus different cryptocurrencies being actively traded, with even more te circulation. And creating a fresh one is spil elementary spil launching a program.
Some cryptocurrencies aim to serve specific industries, like foreign trade or gaming. Others optie technical advantages overheen bitcoin, launched ter 2009 and still the market leader with a valuation on May 23 of almost $37 billion.
Prices for cryptocurrencies can vary widely, depending on who is taking them, who is suggesting them, their technology marketplaces and market compels.
It&rsquo,s the Wild Westelijk out there, but I want to concentrate on bitcoin itself. Specifically, should you buy some right now, or should you not?
Three Pros of Bitcoin
It&rsquo,s Hot: Bitcoin is making some serious coin right now for serious traders. Overheen the past few weeks, speculators have driven the price to $Two,200. If you had bought just $100 worth ter May 2010, when someone bought two pizzas for Ten,000 bitcoin, you&rsquo,d have coin worth $72.9 million today.
The rush to bitcoin has bot latest, prices were below $800 spil recently spil January. Since then, bitcoin seems to have substituted gold spil the &ldquo,safe-haven&rdquo, default. Gold today is priced just where it wasgoed a year ago, an early-year rally to $1,300 vanaf ounce having fizzled ter April. That is just when the present rally embarked to accelerate. Prices have doubled since the April 1 fix.
It&rsquo,s Liquid: Bitcoin is the most liquid of all the cryptocurrencies. Japan&rsquo,s decision to commence recognizing it spil legal tender te April seems to have led directly to the current run-up. Markets ter Japan and South Korea recently priced it at $Two,350 vanaf coin. This seems to be fueling a rally ter other cryptocurrencies.
Markets like Bitfinex, Bitstamp and BTC-e make it effortless to set up an account and trade bitcoin, but prices vary widely. There are also bitcoin markets around the world &mdash, it&rsquo,s a global currency after all &mdash, and their prices can vary insanely, too.
The World Is Going to Hell: The best reason for buying bitcoin has always bot spil a hedge against market uncertainty. Advocates love stories about a coming market crash, the inherent corruption of the Federal Reserve and the capability of banks around the world to create &ldquo,fiat money,&rdquo, backed only by their local economies.
There are places where this fear is real, and where cryptocurrencies &mdash, whose quantity is immobilized by math &mdash, can be a fine hedge. Countries like Zimbabwe, where the government has ruined the local currency, now have active bitcoin markets. The activity of Japan&rsquo,s market stems, te part, from distrust of the country&rsquo,s policy of monetary easing, which has seen the value of the yen from 75 to the dollar five years ago to 111 today.
Trio Cons of Bitcoin
It&rsquo,s Not Real: Bitcoin is a mathematical algorithm. It&rsquo,s not something you can hold te your palm. Its value is based entirely on your trust te the math, the exchange and the preparedness of the market to accept it.
Bitcoin&rsquo,s original advantage wasgoed its anonymity. But this has bot cracked. The vice chairman of the Bitcoin Foundation itself wasgoed convicted of money laundering te 2015, and law enforcement insists that bitcoin owners can indeed be traced.
Bitcoin advocates, te brief, insist that governments are untrustworthy spil arbiters of value. So wij&rsquo,re supposed to trust them?
It&rsquo,s Unstable: What rises quickly can also fall quickly. When the government rejected an effort to create a bitcoin-based exchange-traded fund te March, the price of bitcoin on the Bitfinex market plunged by almost one-third te just more than a week. There wasgoed a quick plunge of $200 te January, and another of $80 last June, when bitcoins traded te the $700 range.
This makes bitcoin unlike real currencies, which normally budge te puny ranges. Bitcoin is fine spil a medium of exchange te Venezuela, where the currency is worthless. But its value spil a medium of daily exchange is more questionable ter the U.S., where it is an investment and a hedge.
Other Coin Is Better: While bitcoin&rsquo,s price has bot rising, its share of the total cryptocurrency market has bot falling. While it represented 80% of cryptocurrency trading a year ago, its share is now less than 50% spil the value of Ethereum, Litecoin, Ripple and others rise.
Even Dogecoin, originally created spil a joke ter 2013 and using the face of an internet meme te its logo, has skyrocketed. A $20 million market te February is now a $200 million market (albeit it&rsquo,s down from $400 million ter May), and other cryptocurrencies are observing similar gains.
Bottom Line on Bitcoin
Complain all you want about the ease with which the Federal Reserve creates dollars. You can create your own cryptocurrency, today, using the PC ter vooraanzicht of you, which becomes real spil soon spil someone is willing to create, or mine, and trade the resulting encryption keys.
So, bitcoin is hot, it&rsquo,s a hedge and it&rsquo,s more than holding its value. But it&rsquo,s not real, its value can fall spil rapid spil it rises, and ter the world of cryptocurrency, anyone can be the Federal Reserve.