In the bitcoin bubble

Scott Phillips, director of research, Motley Fool

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.