You Probably Shouldn't Buy Bitcoin

Edit I've reversed my position. Everyone should hold some bitcoin. The reward potential far outweighs the risks outlined below. Read more here.

TLDR - It is probably a bad idea for you to invest in bitcoin. Instead consider the S&P 500 which has never lost value in a 20 year period.

My Excitement
I'm very excited about bitcoin. It is going to do to payment companies what the telephone did to the telegraph. If that does happen an individual bitcoin is going to be worth tens of thousands of dollars.

My Mistake
Lately I've been wrongly advising friends to put some money into bitcoin, but by some I really mean hundreds or thousands of dollars. I claim 'an amount you can lose without issue', but if something is going to go up soooo much why would anyone get in for just a few bucks? If they believe what I'm saying why in the world would they just get $10 worth?

9 Reasons not to Invest in Bitcoin
Yesterday I blogged about bitcoin and unfortunately recommended readers buy some. Some friends brought up good counterpoints and I've reversed my position. Here is why you should not invest in bitcoin

1. Bitcoin could drop in price 99% tomorrow. In fact on 8/17/2012 it dropped 30% in an hour.
2. 100% of your bitcoins could be stolen from your online wallet, stolen from your computer, stolen by your online wallet, stolen by a virus on your computer, stolen by a virus on your smartphone, stolen by your online wallet host, and stolen by security flaws in your online wallet software.
3. The online wallet you hold your bitcoins with could go out of business.
4. You can lose 100% of your bitcoins by forgetting your password or throwing out a hard drive.
5. You can easily violate US laws you are unaware of. I was unaware of the Foreign Account Tax Compliance Act or of the Banking Secrecy Act Report of Foreign Bank and Financial Accounts requirement which I could easily have violated.
6. Tax compliance is difficult. You should plan ahead but probably won't.
7. Bitcoin price swings will stress you out if your bitcoins go up a lot in price.
8. Bitcoin price swings may cause you to sell at the wrong time, buy at the wrong time, sell at the wrong time, over and over and over. Read this man's unfortunate story.
9. There are lots of bitcoin scams like this ponzi scheme.

How to Surely Get Rich

The sure way to riches is with steady payments and compounding interest. I think the S&P 500 is a great investment and has never lost value in a 20 year period. I have a large percent of my retirement portfolio in the S&P through the SPY fund.

Bitcoin is Provably Valuable

TLDR (too long didn't read) - bitcoin is valuable. The easiest way to buy them is Coinbase.

Bitcoin is two things:

1. A payment network (think PayPal, Visa, MasterCard, Western Union)
2. Money - a medium of exchange, a unit of account, and a store of value.

Why are payment networks valuable?

It is more efficient to exchange money for goods and services instead of barter. For example if I wanted a pound of rice and had a cow it would be hard to fairly divide the cow for my rice, especially if I don't have a way to store the remainder of the cow. Using money it is easy to sell the cow and then purchase the pound of rice. Payment networks make it more convenient to pay for goods and services than physical money. Visa, MasterCard, Discover, and Western Union have shown that payment networks are valued by society. Today their combined market cap is over $250 billion dollars.

Why is money valuable?

Money is valuable because other people will give goods and services for it. If a government states money is valuable but people will not accept it for goods and services. Think that can't happen? It has happened many times before.  Gold is not money, but it is a store of value and gives an idea of how much something can be worth that is not backed by a government. Today the gold in the world is estimated at a value of $8 trillion. For comparison the market capitalization is 14 billion. That means bitcoin would have to go up another 571 times to be equivalent to gold. I don't think there is a question of if that can happen, but a question of if it will happen.

How does this make bitcoin provably valuable?

Bitcoin is a great payment network. Unlike PayPal, Visa, MasterCard, etc. bitcoin cannot go out of business, cannot steal from you, cannot cheat you, etc. It has no marketing budget, no CEO to compensate, no board of directors, etc. 

Bitcoin is great money. Bitcoin is the best way for people to accept money because it is the most efficient, it is nearly impossible to counterfeit, and there is no way for a third party to cancel or modify the payment. It does not use any countries currency making it immune to mistakes made by politicians and rulers of fiat currencies. Like gold there are a fixed number of bitcoins meaning after the volatility settles down it will be a great store of value.

Should I invest hundreds or thousands in bitcoin?

No and here are 9 reasons why.
If you have some money you can lose without issue I recommend considering buying some bitcoins. I believe this is a special time in history, like the 1889 land run it is possible to get very wealthy very quickly with bitcoin, like the gentleman whose $27 investment turned into just under a million dollars in 4 years.

How do I get bitcoins?

The easiest way if you live in the US is through Coinbase.

Your business can accept Bitcoin in 5 minutes

Bitcoin is a great way to get paid because transactions are irreversible and bitcoins can't be forged. So there are no worries about credit card chargebacks and almost no worries about fraud.

The easiest way to accept payment is through Coinbase. After signing  up on their site you can use the Coinbase merchant tools to invoice a customer via email.

Coinbase will let you avoid the price conversion fluctuations of Bitcoin by immediately converting your customers Bitcoin payment into cash and depositing it into your bank the next day. They charge a 1% fee for this service, but have a special right now where the first million USD in sales has no charge.

Coinbase also has services to setup shopping carts allowing customers to buy merchandise from your website with Bitcoins, but that takes a little bit more work to setup. If the volume would support it you may even be able to automate it where they order a product from your website, your website orders from the supplier and then when the order is delivered the customer is emailed for pickup.

Explaining Bitcoin to Grandma

Want to know more about Bitcoin but don't care about the geeky underpinnings?

Here are some differences between Bitcoin and the traditional US financial system:

	Traditional	Bitcoin
Accounts	Most users hold a small amount of spending money in a wallet and most of their money in an account.  To create an account one needs to find a financial institution to supply the account, apply for the account, give them all kinds of personal details, fund a minimum deposit.  Banks accounts pay interest for using account holder's money and charge fees for services.	It is a best practice to hold a small amount of spending money in a "spending account" and large amounts of money in accounts created on machines not connected to the internet. Accounts are created through software or using a service provider. There are no minimum balances and no interest paid on account balances. It is recommended when sending funds to include an optional fee. Today the recommended fee is around 6 cents.
Transaction History	A receipt is needed to provide documentation of payment between parties. In financial institutions transactions are kept private, but may be provided to government entities (courts, regulators, law enforcement)	All transactions and account balances are publicly visible. However account holders are only known if they disclose their identity - such as submitting identifying information to an exchange or as part of a transaction.
Reversibility	Cash transactions are irreversible. Most other types of transactions are reversible.	Transactions are irreversible but the other party may issue refunds.
Issued By	Governments. For more read how US currency circulates.	Computers solving mathematical puzzles. The process is called mining.  Today specialized hardware is needed to profitably mine Bitcoins.
Currency Limits	Governments can create as much currency as they want. This devalues that government's existing currency.	21 million Bitcoins.  Bitcoin is created at a predictable rate and will stop being created around 2140.
Risk of Loss	When I've had fraudulent transactions on debit cards and credit cards they have been reversed no problem by my banks. When I've had cash stolen I've never recovered any of it. US depository funds are covered by the FDIC. Banks have bonds to cover losses.	Improper use of software can result in loss of funds. Having a computer hacked can result in loss of funds. Software bugs can result in loss of funds. Institutions being hacked have resulted in loss of funds. Computer destruction or theft can result in loss of funds.
Sending	To send money a great length of distance I need to use a third party or deliver it in person. Taking amounts over $10,000 across the US border needs to be declared to FinCEN.	The difficulty of sending funds does not change with distance. Bitcoin can be delivered across the globe the same way Bitcoin is delivered to your neighbor.