Internet marketers have really been pushing bitcoin over the past several months. I have been asked so many times about this particular investment it makes my head spin. I have also been approached by several people that have pitched to me the merits of buying bitcoin. I will say up front that I do not fully understand bitcoin, but based on my conversations with investors of bitcoin, I’m not sure that anyone fully understands it. All I can say is that bitcoin is one of the strangest things I’ve ever heard of. If you keep reading, you will find out why.

What is bitcoin?

Bitcoin is presented to consumers as a “cryptocurrency.” A cryptocurrency is an asset that can be securely exchanged for goods. This currency is also supposedly infinitely divisible (that’s right, INFINITELY divisible). How is that possible? Don’t ask me; I’m not the one making the claim. You can buy a whole bitcoin or you can buy a fraction of a bitcoin. You have to get a bitcoin virtual “wallet” to keep your bitcoins in.

Many people will say that bitcoin is a currency; however, this is not correct. Currencies have values that are independent of other currencies and asset valuations. Bitcoin is not independent of the dollar. As Warren Buffet has pointed out, bitcoin fluctuates along with the dollar. Because of this, bitcoin is actually a speculative asset; it is not a currency. Just because you can exchange something for something else does not make it a currency in the strictest sense of the term. Many people object to the notion that bitcoin is not a currency by redefining the term. That’s all well and good, but redefining the term ‘currency’ does not address my argument in a way that is valid. The only way to make bitcoin a currency, at least the only way I can see it happening, is if everyone stops using the dollar and starts using bitcoin instead.

You can obtain bitcoin by either buying it or “mining” it. Before some of you go out to buy a pickaxe, let me tell you how this mining thing works. How would you like to solve ridiculously complex math problems all day? I’m talking math problems that some Ph.D Mathematicians may not be able to solve. Most of you probably don’t like the sound of that, but fear not, you can buy an uber expensive mining rig (a “super computer” as it were) that will be able to solve those problems for you. The issue is, they are very expensive and they go out of date very quickly. You would have to have multiple mining rigs in order to have the chance to make a profit. There is also a finite amount of bitcoins, but not all of them have been “found” yet.

 

What are the Pros of Bitcoin?

Bitcoin is not regulated. Since I hate the federal reserve with a passion of 1,000 burning suns, this is a big plus for me. There are also a lot of large companies that are starting to accept payments in the form of bitcoin. The fact that so many large companies are willing to take this currency shows that they believe either that the value of bitcoin will be stable or it will continue to increase. A lot of millionaires and billionaires also like the idea of bitcoin. Heck, I know some people who have made thousands of dollars off of bitcoin so far. Although bitcoin is volatile, its historical trend shows that it’s value has been increasing more than it has been decreasing. Some have projected that it may become worth $500,00 to $1,000,000. Keep in mind that those who have said that have nothing to back up their claims except wild speculation.

What are the Cons of Bitcoin?

Bitcoin is extremely volatile. Do you like the idea of being able to lose 40% of your investment in a matter of 24 hours? Probably not. At this time, it is harder to make significant money on bitcoin because it is significantly harder for an asset to appreciate 100 fold when it’s worth $16,000 than it is for an asset that is worth $1 to increase by 100 fold. If bitcoin were truly a currency, it might be easier for its value to increase in its infancy, but since its value is based on the dollar, the prospect of it multiplying even 20 fold is unlikely at this point.

You are also risking the possibility of fraud. Fortunately, there are ways to safeguard against it. I won’t go into a lot of detail. I will, however, say to watch out for fake exchanges that tricks you into thinking you are buying and selling bitcoin when you really aren’t. A lot of them will say things like, “Buy bitcoin 5% off.” Who would sell bitcoin for 5% less than what it’s worth if people already accept bitcoin? That is like selling US dollars for 5% off (sign me up)! This is surely a sign of a fake exchange. Your best bet is to make sure you are using a legitimate exchange and a legitimate bitcoin wallet when you are trading bitcoin.

Should You Buy Bitcoin?

Whether or not you choose to buy bitcoin is up to you. I personally do not have any bitcoin in my portfolio nor do I plan to have it in my portfolio. I have thought about mining bitcoin, but I still plan to abstain. The asset is too volatile for my taste. I prefer to invest in debt securities that pay me interest and in equities that pay me a share of corporate profits. My portfolio gives me a good rate of return and its volatility is approximately 1 or 2 tenths of the total stock market’s volatility.

Should you invest in bitcoin, I suggest keeping your speculative assets at 5% or less in your portfolio. Any higher will expose you to risk that you may not be able to afford. If I kept bitcoin as a part of my portfolio, I would keep it at 5%. I’d buy into its weakness and sell off the strength. In other words, if bitcoin became 6% of my portfolio, I’d sell off that extra 1% of bitcoin in my portfolio. If bitcoin took up 4% of my portfolio, I’d buy into the weakness so it would be back at 5%. I used to do this with precious metals such as gold and had success with this strategy up until the end where I made a stupid decision that cost me a couple of thousand dollars! I basically deviated from my strategy and bought too much into precious metals. When it dropped by more than half, I panicked and sold my holdings. Had I hung in there, I would have made a couple of thousand in profit. Ugh. I still kick myself over that. If you don’t panic when it drops or deviate from the strategy I gave you, you might be able to avoid the mistake I made; of course, you also risk losing more money. Ultimately, it is your call.

Remember how I said that mining was basically a colossal pain in the posterior? Well, there is an easier way to do it. A company called USI-Tech has a coin case that you can buy for around 50 euros (I don’t feel like doing the math to find out the dollar amount). You can go and buy bitcoin and put the bitcoin in that case. The company will mine bitcoin and share some of the spoils with you. Their aim is to get you 140% of your original investment in 140 days. That’s a 40% rate of return. Of course, they can’t guarantee that rate, but I do have some friends that are happy with it so far. One of my friends is with this company so I’ll just give you his affiliate link. If you decide to mine bitcoin, keep in mind that there are only a finite amount of bitcoins that can be mined, and we have no idea concerning how many there are.

Conclusion

The way I see it, a company’s valuation still stands regardless of which currency it is measured by. Currency investments and speculative investments are always very risky. I’d prefer to focus on increasing cash flow while also seeking capital appreciation in my portfolio.

I have investor friends that are in bitcoin. I wish them success, but I’m not personally willing to take the risk. Remember, if you decide to invest in any cryptocurrency be very careful. Also remember that Ecclesiastes 11:2 tells us to keep our investments diversified.