Education Resource

Is That a Bitcoin in Your Pocket?

Master Instructor Blog

By now you have probably heard about Bitcoin, which is a virtual currency that has attracted a lot of attention recently. The buzz about Bitcoin can be attributed to two main factors:

1. Recent volatility in speculative markets, which has seen the price of a Bitcoin spike from around $20 to over $260 in April 2013 (at this writing, the coins are worth about $120)

2. Concern from various legislative and regulatory bodies that the currency can be used for money laundering or illegal purchases as a side benefit of its anonymity.

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Bitcoins are hardly the only virtual money in wide use: Amazon.com, for example, has “Amazon coins” that can be used for gaming and other online activities. But Bitcoins are unusual because of the speculative aftermarket. The currency was introduced to the world in 2009 by an anonymous developer using the pseudonym “Satoshi Nakamoto.” According to the bitcoin.org website, “Bitcoin is designed around the idea of a new form of money that uses cryptography to control its creation and transactions, rather than relying on central authorities.”

The originators have announced a “hard limit” of 21 million Bitcoins; once the limit is reached no more will be generated. Currently there are somewhere over 10 million in existence. New Bitcoins are generated by data mining; computers are used to solve complex mathematical problems and can get Bitcoins as rewards if they are successful. As the interest in Bitcoins has grown, most of the “mining” activity has shifted to institutional supercomputers so it’s unlikely an individual would be successful in solving a problem first.

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That leaves the aftermarket—which the Winklevoss brothers (of Facebook/”Social Network” fame) recently promised to make more convenient with the announcement of a proposed Bitcoin EFT. An 18 page list of “risk factors” included with the S-filing includes such concerns as the potential loss of “private keys” which are necessary to trade the currency, possible attacks by hackers (recently a private exchange “was forced to go offline as a result of an attack through which a hacker gained access to private keys and 24,000 Bitcoins”) and finally, the slight difficulty that “it may be illegal now, or in the future, to acquire, own, hold, sell or use Bitcoins in one or more countries, and ownership of, holding or trading in Shares may also be considered illegal and subject to sanction.”

Because the price of Bitcoins is determined by supply and demand—the same forces behind Online Trading Academy’s patent-pending trading strategy—they may be tempting for traders looking for a new asset. The problem is that the factors behind that supply and demand are hardly transparent. Proceed with caution.

Disclaimer
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.