Monday, March 24, 2014
What Is The Value of the Bitcoin?
Susan Tompor: What's the value of bitcoin? Heading for $10 or $10,000?
March 20, 2014 | 12 Comments
300 dpi Phil Geib illustration related to Bitcoin payments. (Chicago Tribune/MCT) / MCT
By Susan Tompor
Detroit Free Press Personal Finance Columnist
Commentary And Criticism
More information on bitcoin
■ The SEC also has issued investor alerts relating to bitcoin. Go to www.sec.gov.
■ See investor alerts at www.finra.org for “Bitcoin: More than a Bit Risky.” As bitcoins are not legal tender, consumers need to realize that a retailer is not required to accept bitcoin. The Financial Industry Regulatory Authority, an independent, not-for-profit organization authorized by Congress to regulate the securities industry, has noted: “Bitcoin use is limited to businesses and individuals that are willing to accept bitcoins. If no one accepts bitcoins, bitcoins will become worthless.”
■ Bitcoin payments are irreversible, according to the FINRA alert. “Purchases can be refunded, but that depends solely on the willingness of the establishment to do so,” the alert said.
Sources: Financial Industry Regulatory Authority and the Securities and Exchange Commission
The crypto-currency craze has had a quick-riches feel of striking gold — or maybe even has the sound of getting in on the ground floor of the next Google or Apple stock.
Honestly, who doesn’t look twice when you hear that the value of the virtual currency bitcoin was just around $20 early last year but shot up to more than $1,000 in early December?
Yet is bitcoin heading for $10 or $10,000?
Bitcoin is a digital currency, created in 2009, that can be used to buy goods or services. Bitcoins exist only on the Internet but some bricks-and-mortar restaurants and retailers now accept them.
And bitcoins are traded on various online exchanges for other currencies.
Yet warnings are brewing that investors who make a bet on bitcoin and other virtual-currency-related investments could be taking a big gamble.
Consumer Reports Money Adviser’s April issue asked: “Is bitcoin the next bubble?”
The Financial Industry Regulatory Authority (FINRA) is cautioning investors that buying and using digital currency, such as bitcon, carries plenty of speculative risk.
“The threat of bitcoin-related fraud is a real danger for investors looking to make a quick profit from bitcoin,” according to FINRA.
While bitcoin trades like money, or another currency, it is not legal tender.
Instead, the bitcoin platform is touted as a new currency that’s free from government or central bank control.
The Internal Revenue Service has not been even clear yet on how to treat bitcoin. Is it a collectible? Currency? Or something else? The IRS continues to study virtual currencies and intends to provide some guidance on tax consequences.
Some news should give potential investors more reason to be cautious.
On Feb. 19, the Securities and Exchange Commission temporarily suspended trading in the securities of Imogo Mobile Technologies, which had announced testing of a new mobile platform for bitcoin a few weeks earlier.
On Feb. 24, the Tokyo-based Mt. Gox, one of the largest bitcoin exchanges, stopped its operations. It subsequently filed for bankruptcy in Japan on Feb. 27 and in the U.S. on March 10.
Gerri Walsh, FINRA’s senior vice president for investor education, said investors should understand that anytime there’s excitement about a new product or idea investors can easily be swept away, along with their cash, by all the emotion involved.
“Fraudsters may see the latest digital currency trend as a chance to steal their money through old-fashioned fraud,” Walsh said.
In the summer, the SEC charged a Texas man and his company with defrauding investors in a Ponzi scheme involving bitcoin.
FINRA’s Walsh said in an interview that regulators are concerned that investors could be hurt if they speculate on the price changes for bitcoin, too.
Regulators warned that platforms that buy and sell bitcoins can be hacked, and some have failed. In addition, unlike U.S. banks and credit unions that provide certain guarantees of safety to depositors, there are no such safeguards provided to bitcoins residing in digital wallets.
Some anticipate that more U.S. regulation is on the way for bitcoin, which could change the landscape and drive up costs.
No doubt, bitcoin prices have seen dramatic swings. After skyrocketing above $1,000 for one bitcoin, the price dropped to around $565 in early March. Volatility is the name of the game. Values can swing based on activities of big players, as well as rumors of how some countries will regulate bitcoin.
Virtual pocketbooks, aside, no one really knows how bitcoin will play out. It is indeed a new game that bypasses the more sluggish, traditional banking system.
Goldman Sachs analysts took on the bitcoin bling and concluded the bitcoin is unlikely to work as a true currency. But some “ledger-based technology,” the report stated, could hold promise.
Where will bitcoin end up?
“I wish we all had a crystal ball and could know,” Walsh said. “But again, that is one of the risks.”
Contact Susan Tompor: 313-222-887