Thursday, December 5, 2013

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.

Wednesday, December 4, 2013

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.