The latest investment craze sweeping the world is Bitcoins, an encrypted, decentralized digital currency that was first introduced four years ago. As rampant money printing threatens inflation and the destruction of currency values, Bitcoins are becoming a big deal because they have a permanent fixed supply. So how do Bitcoins work, and are they worth investing in? Read on to learn more about this new form of currency.
Prior to 1971, the world's major currencies, including American dollars, were backed by gold. Since then, though, nothing tangible backs the world's money. Instead, we operate on a fiat system, and this, coupled with enormous debts, loose monetary policy and weakening purchasing power creates financial instability and the risk of substantial inflation in the future.
Bitcoins have essentially cut out the middleman. The values of the digital currency are established online, peer to peer, without the interference of government or central banks. The currency can be used for purchases or trades, and no government can suddenly devalue them. The exchange rate is established through supply and demand, and Bitcoins now exceed $1 billion in total value.
Although this all sounds great for investors, the digital currency does have some very real weaknesses. Here are four reasons you should think twice before investing in Bitcoins:
No Safety Net
Unlike traditional financial products, like a credit card, Bitcoins have no safety net. If yours are stolen or lost, you are basically out of luck (and money!). Some investors use a third-party “wallet service” to store their Bitcoins, but these services are prone to unreliability and security pitfalls, and potential fraud is always a concern. The alternative is to store the keys to your Bitcoins on your hard drive, but a security breach, virus or hard drive failure can wipe out all of your holdings in the blink of an eye.
Lack of Regulation
The lack of government regulations on Bitcoins has attracted gamblers, drug dealers and others who want to avoid government scrutiny. The currency may one day be deemed a giant money-laundering machine, and its value for legitimate commerce will suffer once the feds regulate it.
Lack of Applications
Bitcoin is great if you want to hide your drug money or gambling fortunes, but what if you want to use it for more conventional forms of commerce? Usage must quickly grow, but if it does not match the expectations of speculators, the value of Bitcoins is likely to crash.
Bitcoins will likely continue to appreciate, but potential investors should know that investing is extremely risky, and you may lose all or most of your money. Follow these tips for investing your money instead!