Would you buy 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:

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