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The New York Stock Exchange has shed almost 1,500 points in the last month.  (Source: How Stuff Works)

Bitcoins, though, have suffered even deeper losses, and aren't a good investment to turn to.  (Source: Bitcoin Forum)

Treasury bonds are a far better investment that bitcoins in recessionary climates.  (Source: Mint.com)
Cybercurrency is intriguing premise, but has seen a flurry of recent devaluation

I've recently heard a couple of advertisements on satellite radio suggesting, of all things, that customers dive into bitcoins as a "stable" investment in the midst of the troubled U.S. economy.  In the midst of a seemingly impending recession, some might be tempted to try such a scheme.  Let's be perfectly clear -- while bitcoins are a worthy pursuit to dabble in, considering them as a place to put your nest egg is a pretty poor decision.

I. Bitcoins are in a Recession Themselves

After a meteoric rise to prices of up to $30 USD/bitcoin at their peak, the crypto-currency has plunged down to around $8 USD.  This alone should be enough to convince any logical investor to stay away.  But it's also important to consider the currency's strong current connection to the USD.

Over the last 30 days 82,099.28€ (Euros), $133,353.44 CAD (Canadian dollars), £119,336.29 (British pounds), and 607,234.53 PLN (Polish zloty) in Bitcoin have been traded on international exchanges.  At current rates, that's approximately $659K USD in volume.  By contrast, the top four USD-based exchanges managed $14.521M USD in trades, or roughly 22 times as much volume.

With approximately 95 percent of trades being in USD, the fortune of the USD intimately affects the fortune of the bitcoin.

When you combine the aspects that bitcoins are tied to the fate of the U.S. economy and that they've been on a downward plunge even sharper than the U.S. economy, the outlook is not pretty for bitcoins as a serious investment bid.  Even amid the stock market's huge losses (with today's $300+ USD decline, the New York Stock Exchange is at its lowest level since December 2010), bitcoins are still not a solid alternative to guaranteed securities like treasury bonds, or a diverse portfolio.

II. Bitcoin Mining is in the Midst of a Correction

Another issue with bitcoin looms on the mining end.  Bitcoin is trying to condense the natural creation of a non-commodity currency to just a couple decades, so it relies on initial seeding of wealth (similar to how people laid claim to natural resource stakes, which in turn gave rise to non-commodity wealth).

But the seeding is hitting a roadblock, as it's no longer advantageous to mine.  With difficulty soaring, it's now impossible for most video cards to break even.  The fastest graphics cards by Advanced Micro Devices, Inc. (AMD) still stand a chance to break even, but they require more than a year of work.

Meanwhile, the difficulty continues to rise at an unforgiving pace.

For those who already have money sunk into bitcoin hardware, they may keep mining for a time, but it may be unsurprising if they start to sell off their stockpiled hardware.

In the long term the market will thus correct itself as, in theory, computation gains will outpace the rate of mining.  However, now is simply not a great time to enter the market as a miner.

III. The Big Picture

Returning to the original point, given the current climate bitcoins are not a much safer investment than stocks, as some purport them to be.  They're actually much worse, at present.

This picture may change, when and if:
  1. Bitcoin trade in foreign currencies picks up, allowing a truly independent currency.
  2. Bitcoin mining difficulties stabilize.
  3. Bitcoin exchange prices stabilize.
Until these corrections fall into place, the currency is simply not a viable investment.

Fans of bitcoin may react negatively to this analysis, but it's hard to argue the hard facts.  Bitcoin is a terrific concept, and one worth supporting.  But when it comes to your money, an investment in bitcoins today, is essentially throwing away a chunk of your money, or perhaps breaking even in the case of mining (given hardware depreciation).

So as the U.S. faces a potential "double dip" recession, consider building a diverse portfolio of bonds, commodities, and stock from highly stable companies (GOOGAAPLIBM, etc.) as a way to guard your assets -- and avoid the bitcoins.


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RE: Don't take financial advice from Jason
By zpdixon on 8/9/2011 11:41:00 AM , Rating: 2
I bought and sold a few times. $30 was clearly a bubble. I didn't sell at the exact peak, but in the $20s and this is where I made most of my profits.

And look at this. Right now Bitcoin went from $8 to $10 overnight (mostly because a few large buyers recognized it was the right time to buy --I see at least a single buyer of 15000 BTC in the mtgox volume). If you had listened to me you would have made an instant 25% profit in 24h. If you had listened to Jason you would have made nothing. Lol.


RE: Don't take financial advice from Jason
By zpdixon on 8/9/2011 11:45:17 AM , Rating: 2
It is comparatively much easier to make money trading Bitcoin than, say, stocks... most people who know about Bitcoin are simple computer geeks, complete financial noobs dispensing wrong advice or behaving irrationally.


RE: Don't take financial advice from Jason
By Pirks on 8/9/2011 1:00:21 PM , Rating: 2
quote:
It is comparatively much easier to make money trading Bitcoin than, say, stocks
No it's not, predicting BTC exchange rate is not easier than predicting stock price, both go up and down all the time seemingly randomly and you have to have Buffet's level of market savvy to predict that correctly and how many Buffets we have around? That's why there are only 1-2 really rich guys, the rest just try to play along but they can't predict exchange rate swings most of the time so they lose and their money go to 1 or 2 Buffets who CAN predict it.


RE: Don't take financial advice from Jason
By zpdixon on 8/10/2011 1:41:13 AM , Rating: 2
It is much easier than you think to profit from trading Bitcoins, mostly because the volume is very thin compared to any other market, and because Bitcoin traders are inexperienced.

In no specific order: I profited from obvious market manipulation attempts by others in early 2011; I profited from personal notifications of imminent interviews/articles to be published in main stream media in March/April; I profited from arbitrage opportunities between less well-known exchanges; I profited from exchange value collapses after being quickly alerted of big thefts of Bitcoins/major hacks.


By Pirks on 8/10/2011 1:44:10 PM , Rating: 2
Your method of profiting (getting access to information earlier than others) is going to work for stock market just the same as for Bitcoin one, so thanks for supporting my argument about no difference between stock and BTC trade ;)


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