This has not been a good month to be an investor in Bitcoin, a virtual currency to allow anonymous transactions over the internet. While Bitcoin has always been controversial due to its wide usage in criminal activity, the currency has caused even more of a stir lately. I’ve been getting a lot of questions on it, so let’s review what happened to the unorthodox currency and what can we learn from its downfall.
In late 2013 Bitcoin surged from around $100 per coin in August to over $1,100 in November. The hype attracted several high-profile venture capitalists, including Tyler and Cameron Winklevoss—the brothers involved in the origins of Facebook (FB).
Web browser pioneer Marc Lowell Andreessen also invested millions in Bitcoin exchanges. In addition to appealing to much of the tech crowd, Bitcoin also attracted libertarians looking for an alternative to the U.S. dollar.
Understandably, my inbox started to fill with questions: What is Bitcoin? Should I invest in it? Where will it go from here?
My answer then—as it is today—is to stay away. In terms of volatility, Bitcoin is worse than a penny stock; swings of several hundred dollars a day are not uncommon. The success of Bitcoin is subject to a lot of macroeconomic and regulatory factors that I do not feel comfortable betting on.
So it didn’t come as a shock when the old adage came true: “What goes up must come down.” A series of setbacks in January and February rocked the Bitcoin community and sent prices plunging. Here are some of the breaking headlines:
- CEO of a Bitcoin Exchange Charged With Money Laundering
- Drug site Silk Road wiped out by Bitcoin glitch
- View from Mt. Gox Reveals Bitcoin Arbitrage
- Bitcoin Exchange MtGox Goes Dark After Theft Report
The last headline is particularly damming: Just a few days ago Mt. Gox—an exchange which handled 80% of all Bitcoin trades at one time—shut down. To put things into perspective, imagine if one of the major stock exchanges—like the NYSE or NASDAQ—simply closed its doors without warning or indication when it would reopen again. It would cause chaos in the financial markets. And when Mt. Gox went offline it cut off millions of dollars’ worth of Bitcoin accounts from their owners, completely undermining the system.
At time of writing this, Bitcoin is trading at about $585 a pop. That is, they’re trading at that price on the exchanges that are still functioning. It’s still unclear about whether former Mt. Gox users will ever get their money back.
So what can we learn from Bitcoin?
You have to be careful with your investments and make well-reasoned decisions—not just trying to jump on the next hot do-dad. Publicly-traded companies try to act in the best interest of their shareholders by paying out dividends, buying back their stock and working to boost earnings. Wall Street’s credibility is further backed by regulatory oversight from agencies like the SEC. Of course, that doesn’t mean you should just buy any old stock. Smart investors perform their own due diligence using the tools they have at their disposal to learn about new opportunities inside and out.
When you focus on fundamentals and operate in a reliable and proven market you stack the odds in your favor.