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Buy Bitcoins: Wise Investment or Fool’s Errand?

The future of currency, or just current speculation?

What exactly is the bitcoin?

The bitcoin is officially defined as a “decentralized internet commodity”; in layman’s terms it could be defined as the cross between peer-to-peer file sharing and trade currency. This concept was implemented in 2009 by a software engineer / cryptographer called 2009 Satoshi Nakamoto. Initially it was regarded as a virtual currency that only drew the attention of wordwide geeks. But recently, a huge speculative bubble has formed, as reports about this project surfaced across broader media. This can be illustrated clearly by the following chart, which shows the market value of Bitcoin in dollars, from its inception:

This chart makes the lucrative potential quite appealing, doesn't it? Well, don't rush off to stock up on BTC just yet! At least finish reading this article first.

Impressive, isn’t it? As you may have heard at this point, fortunes have been made by the early adopters of the Bitcoin. Just a few months ago, BTC could be purchased for under $1, and currently it’s worth 20 times over. Moreover, in the early days of the Bitcoin, it was incredibly easy to get hands of this currency for free. There was even a virtual faucet where you could get 5BTC for pressing a button! Back then, people playfully exchanged and offered each other complimentary bitcoins, because it wasn’t worth that much, and probably never would. Oh, but it did. Such are the ways of the open market – and arguably, of human greed.

Why is everyone talking about BTC lately?

In case you haven’t figured out already… everyone is talking about the Bitcoin nowadays because small (and not so small) fortunes have been made. Literally out of thin air, too! What started as a passtime for a number of computer nerds, quickly rose out of control when the market value of this currency exploded by the hundreth-fold. Many users who had amassed thousands of BTC without much expectations asides from having fun, soon realized they had become millionaires! (at current market rates: 50,000 BTC roughly equals one million dollars). What started as a harmless and whimsical experiment as now clearly overflown to the realms of unabashed and outright scary speculation.

Where this is going, no one knows. Some people claim the bitcoin has real chance of becoming an official currency, in which case its price would keep soaring… its value potentially rising tens or hundreds of times what it’s currently worth. Personally, I don’t see much future for this currency, at least not in its current incarnation. I do think that its market value will peak several times over, before the proverbial bubble eventually bursts. At the time of writing, we’re just past the first of such peaks (as you can see from the graphic early in this article), in which the BTC reached a record value of $35. Driven as it is by the forces of speculation and greed, it doesn’t seem unlikely the value of a single Bitcoin will at some point exceed $100 in the next few months…

But eventually reality will kick in, virtual markets will collapse, and the value of the Bitcoin will flatline by the end of this year. This is merely a speculation by the author of this article, but time will lay the factual matters, as usual. Regardless, the present conjecture offers a striking opportunity for the wise investor. The day of easy fortunes are now past, but it’s still quite possible to take advantage of the speculative bubble before it bursts, and achieve quite substantial investment returns by trading Bitcoins. Again, this is just the opinion of this writer, whom is currently still recently embarked on a bit of experimenting with the noble art of virtual currency trade.

Where can get some bitcoin currency?

Bitcoin Rush: just like in the old days of the Gold Rush!

There are essentially two ways you can get your hands on some of this currency: you can trade it for traditional currency, or you can “mine” for it using your computer (that’s right, just like back in the days of the gold rush).

a) Buy from bitcoin exchange marketplaces. Much like with conventional currency and FOREX, there are exchange markets available for trading bitcoin for other currencies. The largest such marketplace is called MtGox, which currently boasts a remarkable and rising popularity… as you can see from the following chart depicting its traffic growth according to Alexa: exposure according to Alexa

If you’re planning to spend money purchasing Bitcoins, I recommend you spend some time reading about it. To this effect, a good starting point would be the official site, as well as the official BTC community article at the Wikipedia, where you’ll find abundant information and additional resources.

b) Roll your sleeves and mine for bitcoins: That’s right… unlikely as it may seem, you can actually generate this currency using nothing but your computer and a bit of luck, without need to spend a dime (excluding electricity and broadband costs, of course). In simple terms, this is how it works: each day around 8,000 are created in blocks of 50. Each block is literally a riddle wrapped in enigma, covered with secret sauce.

Every minute, every day, increasing hordes of prospectors use their computers to mine this riddle (actually the proper term would be “decrypt”), which is insanely complex and always growing in difficulty as to put a cap on the number of coins created each day. So, there are tends of thousands of virtual prospects who use the Bitcoin client (which you can get here) to mine for this virtual currency.

It’s kind of like a lottery, actually: if you leave you computer on running this software and you have a recent machine with a strong graphics card, the current odds have it that you’ll find a gold nugget (a block of 50BTC) within 30-60 days. That’s if you keep your computer mining 24 hours straight of course. As the network of miners grow (and it keeps growing exponentially), the odds of succesfully striking gold keep getting lower. That’s why most users prefer getting together in Bitcoin mining pools, rather than going solo. In this case they unite their computer resources, increasing the chances of coming across a block… in which case the prized 50 BTC are distributed by the members of the pool. (There are several such pools out there, but I won’t list them here since you can easily find them from the official Bitcoin website. Also, because the point of this article is *not* inducing Bitcoin rush upon you)

If you have a state-of-the-art computer and you join one of these pooled mining networks, you can actually still make a decent buck these days, something like a consistent 1 BTC per day which at current market rates equals 20 bucks. Not bad, eh? That’s why so many people recently have been investing in hardware for mining purposes (especially graphic cards, since the latest GPU’s can mine 100x faster than modern CPUs). Small fortunes have been made using this technique, but the lucrative potential is quickly fading: as more people join the rush and add computational potential to the game, the algorithms get tougher, and it gets progressively harder to strike gold.

Just a few moths ago, good money could be made by getting a couple of extra graphic cards in your computer and running the Bitcoin mining software 24/7. Today, not quite as much.

Where can you spend your bitcoins?

Even though it hasn’t been adopted by major retailers, the past few months have seen the rise of countless businesses that revolve around BTC. Anything from freelance stock exchanges to candy stores, from auction websites to electronics sellers. You can check this article for a regularly updated list of such businesses, which currently number by the hundreds – and growing everyday. The trouble for these businesses, it would seem, is how with the present scenario… let’s face it, anyone willing to spend their BTC to buy candy would be crazy. After all, there’s a real chance its market value will keep soaring steadily, and such person may eventually realize they spent millions of dollars worth of cash in a couple of slim jims. Not the best deal, is it?

This outrageous potential for inflaction is at once the boon and bane of the Bitcoin, and ultimately it will be its undoing. During a few months, everyone will try to hoard as much BTC as possible, hoping to make a fortune. No one will want to sell. Until the market value comes crashing down, and then everyone will try to get rid of their Bitcoins to salvage some profit. You can see where this is going, right?

Well, you’re welcome to share your opinions on the subject matter, so don’t be shy about using the comment form down below.