Punishing investors Bit by Bit

Garnering massive attention from the media in recent months, the online cryptocurrency Bitcoin saw its unit price skyrocket from $200 to well over $1,000 at its peak. The truth is, though, that anyone looking to invest in it should be deterred by the volatility of the currency.

Recently, several crashes in the Bitcoin market illustrated the volatility of the currency, which, in its first major crash, dropped from $1,000 to $500 in a matter of hours, and at the time of this writing, has stabilized — or come as close to stabilizing as Bitcoin can — at $850, according to the Mt. Gox Online Exchange. These drops, brought on by the denunciation of the currency by the Chinese government, have caused some to question the viability of the cryptocurrency.

Bitcoin is a digital currency not tied to any country that is obtained through a process known as “mining.” Mining uses the resources of a computer system to solve a complex math problem that increases in difficulty as more bitcoins are mined. The mining process is so resource intensive that Marginal Revolution estimated that Bitcoin mining accounted for $15 million in power consumption daily in December of 2013. 

Nearly all aspects of Bitcoin have been under widespread scrutiny since the currency’s boom, and the mining process is no exception. Hackers can infect computers with a virus that will utilize the computer’s available resources to mine Bitcoins for the hacker, and only the incredibly tech-savvy will notice a drop in their computer’s performance. However, this only scratches the surface of the currency’s shady applications.

Last October, an apartment in San Francisco was raided, and inside, federal agents found the servers running the largest online underground market at that time: the Silk Road. The Silk Road was an online marketplace for illegal goods and services ranging from drugs to professional hitmen. To ensure the privacy and safety of both the buyer and the seller, the Silk Road could only be accessed through a secure browser, and payments were made in Bitcoins. 

Since the shutdown, numerous markets have popped up to fill the void that the Silk Road left. However, one thing remains common between all of them: the use of Bitcoins as the currency of choice. Bitcoin is ideal for this type of transaction due to its untraceable nature and the anonymity inherently provided by the currency.

The price of Bitcoins, and all other cryptocurrencies that have grown in popularity in recent months, is driven by speculation. Unless you are one of the few who are looking to buy a Lamborghini or a trip to space, the only practical use of Bitcoin lies in its investment opportunities. 

The hype surrounding this investment is the sole driver for the current spike in price, and it is creating a bubble that will soon pop. The price of the currency hangs on a very thin thread, the fragility of which was revealed when the Chinese government denounced and claimed that it would not recognize or allow the trade of the currency. 

The ship to get in on the Bitcoin craze sailed months ago, and investing in such a volatile currency for the long term is foolish.