Yahoo Finance Why Investors Should Beware of Bitcoin
If you timed it right -- and that's a big if -- you bought a single bitcoin for $13.30 on New Year's Day 2013 and sold that slice of digital currency for about $1,150, less than a year later, on Dec. 4. That's more than 86 times the original investment. Wow.
If you timed it wrong, you invested that same day and saw the value plummet more than half by Dec. 22, only 18 days later. Ouch.
Assuming you held that bitcoin longer, from October 2013 ($100) to mid-January 2015, you'd have doubled your money. But you'd also be biting your nails, as the currency has dropped more than 30 percent between Jan. 1 and Jan. 15, when the price hit $207.
So is now a good time to buy bitcoins? Or is it ever a good time to invest in them? Financial experts from all corners of the traditional investment field answer with a resounding "no," while digital entrepreneurs and their ilk say "yes," often to the point of bullishness. Throughout 2014, the Securities and Exchange Commission kept a close watch on bitcoin activity. In May, it issued a warning that "the rise of bitcoin and other virtual and digital currencies creates new concerns for investors. A new product, technology, or innovation -- such as bitcoin -- has the potential to give rise both to frauds and high-risk investment opportunities."
"I'd never recommend anyone 'invest' in bitcoins," says Jeff Reeves, editor of InvestorPlace.com and author of "The Frugal Investor's Guide to Finding Great Stocks." "It's barely even a functional currency, let alone an investment vehicle, and the risks of volatility are enormous. It's a quirky little tech phenomenon, not an investment or asset class."
"A bitcoin has no intrinsic value," adds Greg McBride, senior vice president and chief financial analyst at Bankrate.com. "There's no underlying asset from which a bitcoin's value is derived. Rather, the price is based on the 'greater fool' theory. In other words, that someone else in the future will pay more than you did today."
Bitcoins are a decentralized digital currency that launched in 2009. No government or central bank backs it, nor is its creator known (his alias is Satoshi Nakamoto). Bitcoins have also made headlines not simply for their wild fluctuations, but also because they are nearly impossible to trace, making them a favorite of thieves and drug dealers.
If they're stolen via computer hack, good luck, says Kim Caughey Forrest, vice president and senior analyst of portfolio management at Fort Pitt Capital Group in Pittsburgh. "There are rules about what happens if someone breaks into the bank and steals and how the account owners are compensated. That is missing from the bitcoin world."
She also notes, "We would never tell a client to buy bitcoins as an investment. How can I ever tell if a bitcoin is over, under or fairly valued? I can't. Neither can anyone else. This is what makes an investment. Otherwise, it's a lottery ticket."
That said, you may be able to buy lottery tickets with bitcoins in the future. Online retailers such as TigerDirect and Overstock.com, along with the Sacramento Kings, accept the currency. You can even make donations with them at nonprofits, such as the Electronic Frontier Foundation and higher-education institutions, including the University of Puget Sound.
Meanwhile, the Digerati have embraced bitcoins as a sophisticated method of making financial transactions and currency investments.
"I think the price is getting close to being extremely attractive," says Vadim Telyatnikov, CEO of AlphaPoint, a New York-based digital currency exchange platform that supports bitcoin. "But I wouldn't invest quite yet, as I believe the price may continue to decline in the short term."
He adds, "It's possible to intelligently predict how bitcoin will perform long term" using a "simple moving average" calculated by adding closing prices of the previous 200 days, and then dividing by 200. "That result is plotted on a chart and updated every day, so that a trend upward or downward can be identified," Telyatnikov says.
But what of the recent steep price drops? It may sound hard to believe, but some see a silver (or bitcoin) lining.
"With such extreme instability, we knew the results would be surprising, and we weren't disappointed," says Mike Kane, CEO and co-founder of Hedgeable, a digital wealth manager that can invest retail clients directly in bitcoin. "Most bitcoin insiders are still bullish despite the massive amount of negativity." Based on Hedgeable's survey of five groups, from media members to venture capitalists and angel investors, he forecasts bitcoins hitting all-time highs in three years, which would put it over the $1,150 mark.
Although bitcoins are possibly in a "buy low" mode now, or headed there, daring investors may want to take the same approach as smart gamblers in Vegas: Don't bet more than you can afford to lose.
Mark Williams, who teaches finance at the Boston University School of Management and is a former bank examiner for the Federal Reserve Bank, advises bitcoin buyers to beware. "If investors, after understanding the extreme price risk, still want to invest in bitcoin, they should only commit amounts that, if lost, won't impact their livelihood," Williams says.
Even if you're in such a position, "don't invest in something you don't understand," says Sidney Bostian, an instructor at Virginia Commonwealth University's School of Business and a senior advisor at Cornerstone Valuation in Richmond. "If you aren't interested in the technology, or the general topic of cryptocurrencies, my recommendation is to stay away."
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