/ Money

Would you buy Bitcoins?

Bitcoins, taken by Zach Copley

With savings rates stagnating, I, like many others, have been tempted by the thought of turning a small amount of cash into something significant in a short time frame. As a result, I very nearly bought some Bitcoins…

In January this year, a single Bitcoin was worth about £10. Its value reached a high of almost £170 this Wednesday, before recently falling by around £100.

What caused the collapse? It seems Bitcoin was a victim of its own success. Its high value led to a huge influx of new accounts on the largest Bitcoin exchange, Mt. Gox. Mt. Gox couldn’t keep up with demand and its servers stalled, resulting in a lag between payments. This in turn led to panic selling. As I write, Mt. Gox has suspended trading for 24 hours to help cool things down.

So, while there hasn’t been a complete collapse, do this week’s events indicate the beginning of the end for Bitcoin, or just the end of the beginning?

Bitcoin – what is it?

Until fairly recently, Bitcoin was only known and used by the tech-savvy and those operating in the dark corners of the web (the currency’s been known to be used by some to buy illegal drugs and weapons). But with about 11m Bitcoins now in circulation, plenty of people have been taking a gamble.

So what is it? In short, it’s a peer-to-peer digital currency that operates worldwide without the control of any government or central bank. New Bitcoins are produced via ‘mining’, where computers are given complex mathematical problems to solve. If you’re still a bit lost, watch this brilliant video by Duncan Elms and Marc Fennell:

http://vimeo.com/63502573

My flirtation with Bitcoins

Having read a lot about this currency, including its potential pitfalls and rewards, I decided against buying Bitcoins for a variety of reasons.

I think the Bitcoin market is now nearing a point where it’s less likely to attract active consumers, just more interested investors. And with a large number of collectors hoarding Bitcoins in the hope of making money, I think it could lead into a change in the currency’s ‘rules’. At the moment there are only a finite number of Bitcoins to mine, and with so many investors hoarding them, I think that might result in the supply of Bitcoins being expanded. This in turn would devalue them.

Bitcoin banner wavers might argue that every currency is open to devaluation in this way with politicians and/or bankers printing more of it. However, the problem with a concept like Bitcoin is that it’s based on an ever-expanding supply of people willing to invest in them. But as it’s not a physical asset backed by government and law, there’s no telling if the concept will continue to hold value.

It’s also worth noting that other virtual currencies, albeit in slightly different and far less complex formats, have formed and fallen by the wayside over the past decade or so.

Has the Bitcoin bubble burst?

While in recent months there has undoubtedly been a big increase in Bitcoin price, that hasn’t exactly been matched by its use – you can’t exactly spend Bitcoins in your local supermarket, for example. Although I can’t deny it has some potential, which is why it piqued my interest in the first place.

Still, the fact that there’s no protection if the currency collapses, nor if your hard-earned investment is hacked and stolen, makes me nervous. Do you own or use Bitcoins? What do you think about the concept?

Image credit: Zach Copley

Comments
Profile photo of wavechange
Member

The best bit of the video was when it ended, after three minutes and twenty four seconds. It impressed me less than the shopping channels on TV.

Anyone worried about the stability of investments and currencies might be better thinking about buying gold and other precious metals, in my opinion.

Member
Phil says:
12 April 2013

An article in the week, can’t remember where, compared Bitcoin to the Dutch tulip bubble of 1637 from which mankind appears to have learnt nothing.

Investing in any commodity is gambling on its monetary value continuing to rise. Commonsense ought to suggest that whatever the commodity that is not going to go on forever. Sooner or later there will be a correction and most likely a sudden and nasty one. The people who made money from Bitcoin bought when the price was really low. I doubt there are any big and quick gains to be made now.

Profile photo of cryptocurrencyuser
Member

Hi Phil

Interesting to read your comment from around May 2013. At the time you wrote, “I doubt there are any big and quick gains to be made now.” The bitcoin/USD price when you posted your comment was around $130 USD. Today it is $375 USD.

Bitcoin is still very high risk. It keeps experiencing crises of one kind or another. At the present time, the crisis is over ‘block size’, and there is a strong disagreement in the bitcoin community about the best way forward. It will be interesting to see how this plays out – whether bitcoin crashes permanently, or survives and goes on to scale new heights. Only time will tell. Bitcoin has certainly been resilient so far, but who knows.

As for the Tulips reference, that’s exactly what I thought when I first heard of bitcoin. I thought it was only a commodity, or a currency. But it is also a payment system, and a very clever one, that uses cryptography to create and maintain a decentralised public ledger that verifies ownership. The possible applications of this are enormous and could seriously change the world, not just in finance but in intellectual property, smart contracts, real estate and land registration, and much more. This is where bitcoin’s intrinsic value lies, in it’s utility. This is why comparing tulips to bitcoins is a big mistake. You can’t use tulips to create and maintain a decentralised public ledger that verifies ownership.

I wonder where we will be in another 3 years?! Bitcoin could be $0, or it could be a lot more than $375 USD…..

Profile photo of cdolan
Member

The bust wasn’t due to panic selling but coordinated DDOS attacks on the exchanges. The attackers would hit the exchange, watch as people panic sell, stop attacking and buy up the coins cheap. Once the value increases again they sell and repeat the process. Tech Crunch had a good article on it – http://techcrunch.com/2013/04/10/bitcoin-crash/

Profile photo of Patrick Steen
Member

That was the report as of the 10 April, however, reports yesterday by Mt.Gox put the blame on an influx of new accounts and panic selling after the servers couldn’t keep up: http://www.guardian.co.uk/technology/2013/apr/11/bitcoin-exchange-halts-trade-value
http://www.bbc.co.uk/news/technology-22105322

I’m sure we won’t know the true story, but it does suggest a risk in Bitcoins.

Profile photo of cdolan
Member

Agreed, the exchanges represent a rather large weak point for the currency. Theft of bitcoins is another interesting one.

Profile photo of David Paine
Member

As Patrick said, I don’t think we’ll ever know the true story behind it all, but you make a good point about the exchanges representing a weak point of the currency. If they cannot cope with attacks and/or increased demand then it only serves to cause a loss of confidence and trust in the concept (not to mention money for many). And I think we all know what happens then…

Member
MarkTT says:
13 April 2013

If you still wanna buy Bitcoins in the UK, directly without intermediators on ebay or other middle men (with huge fees) is difficult, I made this guide with a simple process:

http://howtogetbitcoinsuk.blogspot.co.uk/

Profile photo of wavechange
Member

To refer to Bitcoins as a currency is ridiculous, evidenced by their value varying between £10 to £170 in a few months. As an investment opportunity, they could be seen as a new alternative to shares etc., offering the possibility of high short term gains and associated risk.

Two reasons for the recent problems have been suggested. Both are well established problems.

Profile photo of wavechange
Member

Since this Conversation was published, I have been looking for news about Bitcoins. It appears that generating Bitcoins uses a large amount of energy, and no doubt this will rise as they become harder to ‘mine’.

http://www.bbc.co.uk/news/technology-22153687

Unless Bitcoin production can be 100% fuelled by renewable energy, I think it is time to call a halt to the programme.

Profile photo of cryptocurrencyuser
Member

The process of mining bitcoins certainly consumes a lot of energy. Massive amounts. But in order to make a fair comparison you have to consider the costs involved in creating, storing, moving and safeguarding fiat currencies (e.g. the British pound or US dollar), and the costs involved in detecting counterfeit currency and identifying / prosecuting those who create counterfeits. You need bank vaults, armed guards, armoured vans, police, etc.

Bitcoin mining secures the currency, secures the record of all transactions, prevents counterfeiting, etc. It replaces all of those very expensive alternative functions that you need to pay for with fiat currencies.

Member
David Gilzean says:
14 October 2017

Grateful if David Paine could review his thoughts on BITCOIN as its current value exceeds $5200?