In the following post D’Amore-McKim School of Business Professor Jeffery Born shares thoughts on the state of Bitcoin and what you should know before making an investment.
- Bitcoin is still here. While there was a lot of buzz about the more than 20 percent increase in price a couple of months ago, as of Aug. 22, the price is now down to $580. In June, bitcoins had spiked up to almost $723. In May, they were trading at $445, so there was a big spike up (nearly 40 percent), followed by a big drop (just over 20 percent). Quite a roller coaster.
- Bitcoins do not ‘grow’ (like trees or corn) nor do they pay interest, so the only way that an investor can profit from a Bitcoin investment is through price appreciation. While bitcoins have risen strongly since May, their price is only about half of the high value it reached in November of 2013. During the same period the S&P 500 has risen by about 24 percent, not including the dividends these firms have paid.Bitcoins should be considered a high-risk investment, meaning the investor is prepared to lose virtually everything invested. High-risk investments should be no more than 5 percent of one’s portfolio and I would recommend that one’s portfolio should be worth at least $250,000 before making a serious investment in high-risk assets.
- Bitcoins are not backed by any government or real asset(s), they do not earn interest, nor do they represent ownership in anything (like a share of stock). Their value is determined entirely by what investors/users are willing to pay for these ‘coins’. Because they are ‘virtual’ they can be (and have been) stolen by hackers. The number of individuals holding bitcoins is unknown. Anyone who says they can predict the future price of bitcoins is blowing smoke.
- The fact that a bitcoin is not considered a legal currency anywhere and it is not issued by any government should be a very serious concern for potential investors. These are not ‘money’ – they are a virtual piece of paper masquerading as money. There have been plenty of other goods that have served as ‘money’ for a short period of time (e.g. Wampum for the Native American Indians, cigarettes in some World War II prisoner of war concentration camps) and then they vanished from economic life.
- There are already challenges to the Bitcoin: Litecoin, Darkcoin, Dogecoin, Peercoin, Primecoin, and there will be many more before this fad runs its course. The appeal is irresistible – individuals/firms will try to ‘create’ something out of air and convince folks that ‘it’ has value by getting them to trade real money or goods for our branded ‘money’ and keep the real things. Maybe I missed my calling… How about a Bornagaincoin?