"I think the stock market is getting into the overbought territory. Gold is due for a pullback. To be honest, I don't see many opportunities out there other than bitcoins." These were the words of wisdom from my good old friend Mr. Speculator. While most have forgotten about the virtual currency, Mr. Speculator thinks there's an opportunity.
His reasoning behind this shows he is very naïve. He said, "The bitcoin prices have come down significantly from their highs. Buy low."
It seems as if Mr. Speculator has forgotten one of the most basic lessons of investing.
Sure, bitcoin prices have declined—in fact, the word "collapsed" should be used. Just a few months ago, one bitcoin could be purchased for more than $1,100. Now, the price hovers below $700.00.
If you are considering bitcoins to be a good investment opportunity, you have to know what is really happening; there are too many concerns surrounding the currency, and investors should be aware of them.
One of the biggest concerns, among many, is that one of the main exchanges where bitcoins could be bought and sold, called Mt. Gox, filed for bankruptcy. Before the exchange filed for bankruptcy, there were complaints about users not being able to withdraw money. With this, there is also evidence of fraudulent activity. (Source: Finley, K., "Bitcoin Exchange Mt. Gox Files for U.S. Bankruptcy as Death Spiral Continues," Wired, March 10, 2014.) This is sending out a wave of fear.
Another concern is that usage of the virtual currency is being questioned. Will bitcoin ever get the currency status?
Consider this: a company called Balanced Energy LLC, based in the Southlake suburb of Dallas, Texas, was told by the Texas securities commissioner to stop using bitcoin for investments in oil and natural gas wells. This move by the state commissioner was the first of its kind. (Source: Preston, D., "Texas Tells Company to Stop Investments Using Bitcoin," Bloomberg, March 11, 2014.)
That's not all. The Japanese government has come out with a strong stance against the bitcoin, as well. The finance minister of the country, Taro Aso, simply said, "It's not money." (Source: Mallard, W., "A week after Mt. Gox collapse, Japan struggles to understand bitcoin," Reuters, March 7, 2014.) This raises further questions about the acceptability of the bitcoin.
Since the bitcoin frenzy began, my stance has been the same: the virtual currency is in a price discovery mode. It's not stable just yet, and it's still not very clear how it will be used and at what capacity. Nonetheless, it's very interesting to me.
Long-term investors should avoid it for now, even though the prices have come down. It can go lower and their portfolio can be hurt. Long-term investors may consider going into bitcoin once the virtual currency is defined and can be used broadly. Until then, it won't be surprising to see the value fluctuate wildly.