Investing in Bitcoins

Dec 28, 2013

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
Bitcoins have made headlines around the world due to their increased use and popularity. Recently, the Reserve Bank of India has warned against the use of bitcoins due to risks of money laundering and cyber security. In response, a number of Indian bitcoin operators have suspended operations temporarily or closed down.

Bitcoin is a virtual currency. It is maintained by a network of computers that record transactions, and control the supply of available currency. The currency is not backed by any government, and many users view it as an alternative to national currencies. There are a limited number of retailers that accept bitcoins as payment, and they are often used for cross border transactions.

In recent months, trading in bitcoins has increased dramatically. This has caused the value of bitcoins to be extremely volatile. In 2011, the value of bitcoins fluctuated between $0.30 and $32. In 2013, bitcoins have peaked at over $1,100. Today, bitcoins are trading at around $800. These price movements indicate extreme volatility, much more than any other commonly traded financial asset.

The reason for the extreme volatility is that there is a high level of regulatory uncertainty over the use of bitcoins. In addition, even without legal issues, there are questions as to whether companies and individuals will actually transact using bitcoins on a large scale. But by far the biggest hurdle is regulatory, and many governments around the world are seeking to curb the use of bitcoins.

Does it make sense for an investor to consider bitcoins? Unless you want to be exposed to very high risks, it is a bad idea to invest in bitcoins right now. This is due to the high regulatory risk. If enough regulators curb the use of bitcoins, then the currency would fall to zero value very quickly.

For those who are interested in bitcoins, the best thing to do is to wait until the regulatory environment settles down. Over the course of the next year, we can expect countries to issue regulations on virtual currencies. Once this is done, there won't be such a regulatory risk on bitcoins, and then we can consider investing in them.

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is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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1 Responses to "Investing in Bitcoins"

RK77

Dec 29, 2013

Thanks Assad for this useful article on Bitcoins. Is this the first step to Barter Trading with the apprehensions of the collapse of the world economic system as we know now? Gold, the historical hedge against erosion of wealth, is reportedly heading for a 30% drop (if the cassandras are to be believed), USA may buckle under its enormous debt and emerging economies facing turbulent times. Bitcoins or some such alternative to current financial system may lead to a state where no currency could be trusted. Based on demand and supply the commodities and services may be bartered through e-exchanges! Is that a real possibility or a nightmare?

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