Investing In Bitcoin: 4 Major Problems

12/2/13 1:06PM EST

Investing In Bitcoin 4 Major Problems Investing In Bitcoin: 4 Major Problems

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Bitcoin is all over the news once again. The cryptocurrency is the wave of the future according to its horde of fans, and investors are losing out if they’re staying away from the currency. Some investors will be worried that this talk is justified and they’re missing out on an investment in the next big thing. There’s reasons to distrust the argument, however.

The Bitcoin talk may sound like the froth around a bubble to more experience investors. The valuation of the cryptocurrency is based on little apart from future expected value. This reasoning is justified. Bitcoin’s valuation is so volatile at the moment that buying goods and services with it is difficult. There are other problems for those who want to invest in Bitcoin, but here’s a look at the four major issues.

Bitcoin Design Flaws

There are a couple of major flaws in the design of the currency, and for those looking to invest in the cryprocurency these may be a problems. The first major problem is that Bitcoin is deflationary. The currency will naturally become more valuable over time. That means there is less impetus to spend coins. They will be worth more next week. The currency is designed to have a maximum of 24 million units in circulation at any time, inevitably leading to deflation.

A second major problem is that Bitcoin is anonymous. The fact that the currency protects the identity of users is not the major problem, though that causes certain issues, the fact that nobody knows who built the currency does. Currencies are backed by the strength of a state. Bitcoin is supposed to be backed by the security of its computer code. The fact that nobody knows who designed the code makes it difficult to trust in the currency, and conspiracy theories about the origins will be easier to foment than those about the Federal Reserve.

Bitcoin Might Be Useless

Bitcoin was designed to be anonymous, it was designed to keep its value, and it was designed to keep the identity of those using it a secret. The problem is that nobody accepts Bitcoin. The currency is still taking off, and there’s nothing to guarantee it won’t be used en masse in ten years, but today the currency is close to useless. Its volatility means that most merchants accepting the currency only accept the US dollar price of goods in Bitcoin.

Along with the dearth of merchants really offering their wares in Bitcoin is the lack of Bitcoin payment infrastructure. There are a huge amount of companies that make the international currency system work properly. Bitcoin does not have these tools just yet. Until people begin to accept Bitcoin at face value and the currency has infrastructure in place, it is essentially useless.

Bitcoin may not be a bad investment, but there is little doubt that it is a risky one. Investors should think long and hard before attempting to get into the virtual currency market, the risks are almost impossible to quantify. Though the bet might pay off, it is speculation. Investors would be better off putting their money into something they understand a little better.