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.
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.
Fool contributor Dan Newman owns shares of Starbucks, eBay, and a handful of bitcoins from 2011. The Motley Fool recommends and owns shares of Amazon.com, eBay, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.