If Someone Invests $200 Million in Bitcoin, Should You?

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Bitcoin finally hit the mainstream press this year, helping cause a spike in the value of a bitcoin from under $20 at the start of this year to more than $260 in April, and now it hovers around $100. With the attention came a lot of novice voices asking if they should grab a piece of the latest craze -- the Beanie Babies of currency, if you will. Thankfully, the technical hurdles involved in converting dollars to bitcoins make it difficult enough for many to give up and stay away from bitcoins.

Recently, a story about private equity fund preparing to invest $200 million in a bitcoin mining-related company might have caused some to redouble efforts to get into bitcoins. The story turned out to be fake and represents another reason you should stay away from bitcoins if you have little understanding.

If you can't spot the sucker ...
The bitcoin market is a great example of why regulation is not all bad. There have been numerous thefts, scandals, and issues that have burned many people. In the latest, the SEC charged a Texas man in late July for running a bitcoin Ponzi scheme, promising investors 7% interest per week, and taking in 700,000 bitcoins. While these bitcoins were worth about $4.6 million when taken in by the "investment fund," they're worth more than $70 million today. The scheme was paying out interest with funds from new investors, while the man was spending a portion on rent, food, and gambling, according to CNN.

This fake news article could have been a ploy to manipulate the bitcoin market. Whether it was or wasn't, it demonstrates that hype and not fundamentals have led to bitcoin's current value, and as an investor, you're gambling more with luck than with knowledge. You're also gambling on:

  • Making sure you have the technical knowledge to keep your bitcoin wallet, a computer file, safe and secure.
  • Whether the SEC and governments will crack down on the alternate currency.
  • The future acceptance of bitcoin as a store of value and medium of trade.
  • Having the returns of bitcoin outpace alternative investments.
There are many unanswered questions, just like a small-cap, high-growth stock. But there's much more danger in dealing with a potential government target rather than a company attempting to grow itself within established legal boundaries.
Different digital currency opportunities
If you don't have the knowledge to be comfortable investing in bitcoins but want to place some money on digital transactions, there are plenty of other opportunities. (NASDAQ: AMZN  ) , becoming notorious for sticking its hands into every possible business ever, has its own Amazon Payments platform. Customers can use it to send money, and websites can use it to take money. Amazon also recently came out with Amazon Coins, its own currency that can be used on Kindles for applications and games. The coins are meant to increase consumption on Amazon's own Appstore for Android, because if you buy coins in bulk, you receive a discount.
eBay  (NASDAQ: EBAY  ) , of course, must stay on top of the digital transaction business with PayPal. Being the first mover in online payments back during the tech bubble, PayPal has more than 120 million active accounts. PayPal's revenue, which makes up 40% of eBay's, grew 20% year over year to $1.6 billion during the last quarter.
Flying a bit under the radar with digital transacitons is Starbucks (NASDAQ: SBUX  ) . The coffee king has invested $25 million in Square, a mobile payment start-up handling $15 billion annually in payments. The investment gives Starbucks only a small slice of Square, but now consumers can use Square to pay at 7,000 Starbucks around the country. As paying for a cup of coffee becomes easier, Starbucks could sling more lattes, learn more about their customers' habits, push promotions directly to their phones, and boost their bottom line.
... then you are the sucker
If you only learned about bitcoin because of its recent run, chances are you don't have the knowledge to confidently invest in it. Take that cash and put it in a more stable, less risky investment.

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Read/Post Comments (4) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 07, 2013, at 10:00 AM, Bpaxon wrote:

    I don't even have to read this article to know its against BItcoins. My question is what kind of idiots are the ones to buy them in the first place...

  • Report this Comment On August 07, 2013, at 10:01 AM, hennessyhemp wrote:

    Bitcoin is more than simply a currency. Comparing it to beanie babies is a severe misunderstanding, and makes it seem like a toy, which means you have perhaps already dismissed it as such, which may very well be foolish ;}

    Bitcoin should be thought of more like Linux, to fiat's Microsoft. Due to the open source nature of the code, many permutations of this currency will come and go, with improvements and upgrades implemented along the way. Bitcoin is a protocol as much as a currency, and the underlying code serves as a fairly complete banking system, minus the fiat in's and outs. I believe the whole network is a Proof of Concept, which is proving itself (admirably), and most people still utter "bit-what" when you mention it.

    The future of currency is here now if you ask a Bitcoin user, and the rest of the world has yet to wake-up.

  • Report this Comment On August 07, 2013, at 10:24 AM, NobodysFool2011 wrote:

    So the author of this article cites examples of fraud (ie: the man with ponzi scheme), well, did Bernie Madhoff take Bitcoins?

    Point is, anywhere there's anything of perceived monetary value there will be thieves and scammers. One important thing to be learned from Bitcoin, is the non-repudiation policy meaning, if you send your coins to a scammer, you can only blame yourself. Many believe this teaches a very important message of financial awareness. Do your due diligence before transferring funds because you can't cry to your bank, credit card company or authorities if you make a stupid mistake.

    Bitcoin is a brilliant concept that has taught many people concepts such as fiat, decentralized networks, etc.

  • Report this Comment On September 02, 2013, at 8:19 AM, madtechtrading wrote:

    Get a clue. Bitcoin makes all current payment & monetary systems obsolete.

    Immune from currency debasmement.

    Immune from Bank Failure

    Immune from Sovereign Default

    Theft and fraud of Bitcoin will soon be eliminated - the forensic software tools to do this are now being created by several software companies.

    The same author is also recommending we ditch digital camera's and go back to film , ditch e-mail and go back to snail-mail , ditch colour LCD TV's for Bakerlite radio's.

    It's impossible to stop the future. Bitcoin is the future of Money. Wise up - it's on record that you do not have a clue of the transformation which is happening here.

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