BitCoin. Crazy or Smart?

Bloomberg Writes: Bitcoin Spawns China Virtual IPOs as U.S. Scrutiny Grows

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Bitcoin craze is reaching new heighs in China.

Sun Minjie is a 28-year-old Internet worker who lives in Beijing. Eager to profit from growing demand for the digital currency, Sun has invested more than $3,000 in a company called 796 Xchange Ltd., an online exchange for trading stocks and other financial instruments related to Bitcoin, where initial public offerings are also being held.

He’s part of a small but growing group of investors in China who have put the country into contention with the U.S. as the biggest downloader of the virtual money that’s being used to buy a growing range of goods and services online. While intensified scrutiny by U.S. regulators casts doubt on the currency’s future there, China’s Bitcoin industry is expanding.

“What’s worrisome is that a lot of people could be just treating it as a speculative investment,” said Peter Pak, head of trading of BOCI Securities Ltd. in Hong Kong. “In China, the stock market, property and bond market are all not so good, so people get really excited when they hear of a new investment that generates high returns.”

Sun’s outlay of about 28 Bitcoins — or $3,108 — for more than 400 shares in 796 Xchange has returned about 46 percent since the stock’s Aug. 1 debut on the company’s own website. The benchmark Shanghai Composite Index (SHCOMP) has only gained about 2 percent during the same period.

Expensive to Crack’

Bitcoin is similar to other currencies — say, the Mexican peso — except it’s not controlled by any government and the total number is capped at about 21 million coins. Computer users can “mine” them by solving mathematical puzzles — uncovering the hidden series of letters and numbers that matches up with security keys specified by the computer programmers who invented Bitcoin in 2009. As more are mined, the puzzles get harder, and therefore more expensive to crack.

Sun turned to shares of Bitcoin companies after initially trying to mine the currency crunching algorithms on souped-up PCs at his office and home. He gave up after a month, concluding that his computers weren’t up to the task.

“Simple desktops can no longer dig them up,” he said.

Read the rest of the article here.

So, is Bitcoin a legitimate currency, a speculative investment or the future. This is a complex matter to discuss as there could be an infinite number of arguments made for or against it. However, here are some basic points to understand…. 

1. Understand that Bitcoin is a pure speculation at this stage. There is nothing to back it up and there is nothing to assign any sort of fundamental value to it.   As such, speculate away, but know that while it can appreciate significantly it can also go to zero in no time.

2. The US Government can crush it at will and at any time. Yes, I know it cannot be controlled by the government, it is independent and out there on the net. However, don’t be a fool.  As NSA just showed, the US Government basically controls the Internet and as such if it really wants to, it can destroy Bitcoin in hours through various means.

3. There is very little volume and the total value as a currency is very low. While it can be an advantage when the currency is going up, good luck trying to get out of it while it is heading down.  Plus, the fact that people in China see it as an investment vehicle now is a huge negative red flag.

Basically, there is no fundamental value to invest in Bitcoin at this stage. While it can appreciate significantly, know that all gains would be out of pure speculation.  There are no fundamentals to back it up.  On the flip side it can go to zero either because of the speculation or if the US Government decides (for whatever reason) to pull the plug on it.  I say it is too much risk if you value your money. 

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    • Greg

      Well totally agree with bitcoin stupidity, but it’s obvious people want protection from the blatant debasement of currency. Gold has not behaved that way like its supposed too due to what I believe is massive deflationary forces and govt intervention. Are you a believer in gold. I am but only after the record margin debt of investors gets wiped out and people have to sell whatever regardless of what it is. Also I follow martin armstrong too and he is adamant like you are that 2015.75 is his timeframe for massive change. I’m not sure you follow him but he is pretty popular. I tend to agree with you but just being devils advocate and researching all possibilities. Keep up the good work and happy thsnksgiving

      • Alex Dvorkin

        Hi Greg, thanks for your note. Happy thanksgiving as well. I wrote about gold before, please see it here. My view still stands http://www.investwithalex.com/gold/ Yeah, right now there are so many cross currents that it is difficult to understand and make money. Yet, I still think the USD is the best protection against everything. I know its not a popular view, but it makes sense to me.