The year 2013 marked the notorious rise of Bitcoin. Although the currency has been around since 2010, last year, the virtual currency increased in value by over 1100%. In other words, had you bought $100,000 worth of Bitcoin, and sold it at the right time, you would have become a millionaire in 12 months.
While Bitcoin peaked at over $1,100 at the beginning of December, by April of 2014, the price had plummeted to $400 – primarily due to the collapse of one of the most prominent Bitcoin exchanges, Mt Gox, which had $500 million worth of Bitcoin siphoned by hackers. As this clearly reveals, there are significant risks associated with Bitcoin investments.
How Did Bitcoin Become Popular?
Bitcoin is a virtual currency with a limited supply – making it a resource that should theoretically increase in value over time. Although the currency was initially used as a way to mask illegal activity, it became more prominent in 2013 as multiple legitimate businesses began accepting the currency.
The novelty of Bitcoin remains in its independent status. As it is not tied to any nation’s financial system, like gold, it should maintain its value during times of economic instability. However, unlike gold, it is 100% virtual – meaning that it is difficult to ensure your investment’s security.
Nonetheless, as a new generation matures – one that is tired of government regulation – the potential for Bitcoin to gain additional traction appears high. Prominent businesses such as Overstock.com are already accepting the currency, startup incubators and venture capital firms have been developed for businesses that use Bitcoin, and Entrepreneur Magazine as a section of their website devoted entirely to the currency.
It appears that the virtual currency is here to stay. But should you invest in it?
Is Bitcoin a Worthwhile Investment?
When looking at the history of Bitcoin, it is difficult to determine whether the currency is experiencing its demise, or whether now is an opportune time to invest. The value of the currency has dropped $700 in the last four months. However, it is still $300 higher than it was at the beginning of 2013 (a 400% increase).
We all dream of the 1000% annual return on our investment. Imagine the beauty of retiring 10 years early. However, losing your current retirement and having to work for an additional 10 years would be far from enjoyable.
Therefore, when it comes to Bitcoin, what should you do?
Bitcoin as a Retirement Investment – Probably Not
The fluctuation of Bitcoin makes it a high-risk investment. Placing your life savings into Bitcoin is just as likely to leave you broke as it is to expedite your retirement years. Based on standard deviation, the Bitcoin exchange is 8x more volatile than the stock market. In other words, it can very easily send you to the poor house.
With the instability of this virtual currency, you are wise keeping your nest egg in “real life” investments.
Bitcoin as a Long-Term Speculation Investment – Definitely
For the investor open to risk, investing in Bitcoin has the potential to pay off big. Because there will never be more than 21 million Bitcoins, if the currency continues to gain popularity, its value will never stop growing.
Those who invested in the currency two years ago would still have an 800% ROI. And, had they sold it in December, their investment would have been in access of 1500%. Therefore, if you have a few dollars to spare, and plenty of time to wait out the slumps, an investment in Bitcoin could prove to be a lucrative financial move.
In short, Bitcoin is an attempt to provide real value to play money – which is what governments do every day. If this virtual currency succeeds, those who invest early on will reap tremendous benefits. If, however, the public decides to view Bitcoin as an alternative to Monopoly money, then any investment in the currency will be lost.
For those who consider the lottery and blackjack as investments, Bitcoin is a safe financial move. Meanwhile, for those hesitant of the stock market risks, don’t even think about Bitcoin.