How to Buy Bitcoins – and is there a Bitcoin Bubble?

Investing

Bitcoin has been much in the news lately. With the euro in a perpetual state of crisis, and wealthy Russians and Venezuelans seeking to shelter their wealth from kleptocracies, bitcoin makes a great deal of sense. Does it make sense for Americans? To an extent, but mostly as a diversifier – beware of a growing bitcoin bubble.

Bitcoin, Explained

Bitcoin is a non-governmental virtual alternative currency. First developed in 2009, bitcoin is a free-floating currency that exists in computer chips around the world. There is no central bank out there with the mission of distorting or regulating its value relative to other currencies (though any central bank, or any other market player large enough, can affect the value of bitcoin relative to other currencies if it wanted to, simply by buying or selling enough of it.

There’s about a billion dollars’ U.S. worth of bitcoin in circulation now, but that can vary substantially based on the gradual expansion of bitcoin available in the market, and on the exchange rate versus the dollar.

To understand bitcoins, you have to go back to the basics. All currencies are exercises in the triumph of hope over experience.  They have value only insofar as others are willing to accept them in exchange for goods and services. They will do so only to the extent they have confidence that they themselves can exchange the currency they received for something of value to them.

Any item that cannot readily be counterfeited and is reasonably scarce can be used as a currency. It’s simply an abstraction: a store of value. It need not have intrinsic value in and of itself (you can’t eat gold), but others are willing to put their faith in it, and so it’s useful.

Note that there is nothing in this definition that requires anything like a government or a bank to act as an intermediary. And since the currency need not have intrinsic value in its own right, it does not even have to exist in physical form. Enter bitcoin.

 Why experiment with bitcoin?

From an American point of view, bitcoin is perhaps a useful way to diversify your savings out of an increasingly debased dollar and into something else, without sacrificing too much in the way of liquidity. Traditionally, Americans have used gold, silver and other precious metals, along with inflation, as a diversifier against inflation and a declining dollar. The disadvantage, of course, is that it’s tough to spend this money. None of these items – with the possible exception of precious metal coins and bullion, to a limited extent, are much good as currency. You certainly can’t easily mail order something and purchase it with gold. You can’t wire gold, either.

How can investors get bitcoin?

The largest bitcoin trading platform is run by a company called Mt. Gox, which handles about 80 percent of global bitcoin trading activity. You can open an account at Mt. Gox or a number of other companies, just as you would with any FOREX brokerage firm.

Moral to the story: be careful with the bitcoin economy.

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