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Has the World gone a Bit(coin) mad?

Posted by on in Financial Services Blog
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Regular readers will know my dislike of gold as an investment but recently I've come across an "investment" I hate even more – Bitcoins.
Bitcoins are a virtual currency that can be traded for real cash or used to purchase actual physical goods from sellers willing to accept them as payment. There are even reports of a seller of a New York Flat who will only accept Bitcoins as payment. They can also be traded through exchanges.

Proponents of the Bitcoin system state that because the system has a limit on the number that are allowed to be created they will hold their value over time, much like any other supply limited commodity. This is in contrast to our currency system where central banks can create new money at will, which has the effect of devaluing the money already in circulation. This is a similar argument presented by fans of gold and it is not dis-similar from the arguments put forward about tulip bulbs in the 1600s in Holland.

Like any "asset" it is worth what people are willing to pay for it and like any "currency" it is only worth something if people have faith in it. The value has certainly increased - in February 2011 one Bitcoin was worth one dollar. In April this year as Bitcoin fever took over, their price, or perhaps I should say the exchange rate, briefly rose to over $220, before collapsing by two thirds over the next week. I've always been amazed that people will pay in excess of $1000 for a shiny bit of yellow metal and declare it an investment, but I find the fact that people will pay hundreds of dollars to be the owner of unique computer code mind blowing.

But how long until a rival "digital currency" is created? Who will decide if Richardcoins are valid and what they are worth compared to Bitcoins, pounds, dollars or even tulip bulbs? Incidentally, on my exchange Richardcoins are currently trading at £100 each, any buyers please give me a call.

Bitcoins certainly won't be forming a part of my client's portfolios anytime soon but Richardcoins on the other hand...

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