In the bit­coin bub­ble

Scott Phillips, di­rec­tor of re­search, Mot­ley Fool

Money Magazine Australia - - IN BRIEF -

Bit­coin is – again – the word on every­one’s lips. Af­ter hit­ting record prices in 2013, things went quiet. But you can’t keep a good spec­u­la­tive bub­ble down – un­til it pops, that is.

Bit­coin prom­ises the best of two dif­fer­ent worlds: anonymity but also com­plete se­cu­rity. Its un­der­pin­nings are a bit of techno-jar­gon called blockchain. In short, the “ledger” of who owns what doesn’t sit at a cen­tral bank – or any bank at all. In­stead, the records are kept si­mul­ta­ne­ously across many com­put­ers that all check in with each other. And the own­ers are known only by a string of unique text; the sys­tem doesn’t keep a record of who is who.

Buy­ing and sell­ing bit­coin is sim­ple enough: you find a mar­ket­place (on­line, nat­u­rally) and swap your dol­lars for bit­coin. Just don’t lose your code or your com­puter. Oth­er­wise, you could be se­ri­ously out of pocket.

And then? Well, that’s the thing. The value of bit­coin, like any other as­set, is de­ter­mined by what some­one else will pay for it (which at the time of writ­ing was $3850 for one). And that’s been a roller­coaster ride thus far.

So all you have to do is work out how to value it… which is pretty much im­pos­si­ble. It pays no in­ter­est or div­i­dends; it makes no prof­its. So there’s no way of know­ing how much some­one will pay you for it 12 months or 12 years from now.

Maybe bit­coin will age like a Pi­casso or a bot­tle of Grange. Or it’ll go the way of Beanie Ba­bies and that col­lec­tion of hub­caps in the shed that you’re sure will be worth some­thing some day. The prob­lem is there’s no way of hand­i­cap­ping the odds: and that’s a poor way to in­vest.

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