Three Reasons Not to Buy Bitcoin

02/19/2014 9:00 am EST



Should you consider buying Bitcoins? Jay Taylor believes they could be one of the riskiest investments around. In Daily Profit, he offers three simple reasons to stay on the sidelines and not buy this virtual currency.

First, Bitcoin is not a proven alternative asset. As part of my diversified portfolio, I like to own gold and silver. One easy way to do this is through the popular ETFs that track their value.

Most long-term investors who hold gold ETFs, or silver ETFs, are seeking the diversification offered by alternative assets. After all, these assets are thought to be a good hedge against the US Treasury printing money.

While Bitcoin is certainly an "alternative" to owning stocks and bonds, or holding US dollars, it is not necessarily a reliable one. Gold and silver have been around for a very long time. You can pick them up in your hands and both have industrial uses. The same cannot be said for Bitcoin.

Bitcoin is merely a promising digital currency experiment. It was dreamed up out of thin air and the first Bitcoins entered circulation in January 2009, just five years ago. As a matter of fact, the person or group that created Bitcoin did so under a pseudonym, so we don't even know who created it.

I don't know about you, but when I go looking for alternative assets to put in my portfolio, I prefer something with more than five years of history and at least some physical existence or value.

Bitcoin isn't a share of a company or a bond to be repaid by a borrower. Bitcoin is new, completely different, and its future isn't certain. While it could have a place in a speculative portion of your portfolio, Bitcoin is not a proven and reliable alternative asset.

Second, Bitcoin's legal status is uncertain. While no laws have been passed in direct response to Bitcoin, its prominent use in criminal enterprise makes it a high profile target for law enforcement and legislative efforts. Even for those using Bitcoin legitimately, tax implications and the legal status of Bitcoin exchanges remain uncertain.

And my third concern is this: how do you value a virtual currency? The argument that Bitcoins have no real value is a tough pill for Bitcoin advocates to swallow.

They will argue that, relatively speaking, the US dollar and the euro have no real value, as they are not backed by any hard assets either. And, while true, this argument misses the point.

Sure, the US dollar is no longer backed by gold, silver, or Treasury Notes. However, US debt and currency is backed by the full faith and credit of the US government. The government can tax to pay off its debts, while Bitcoin is pure speculation.

Bitcoin has no assets or central bank behind it, whatsoever. For some people, this is exactly the appeal of Bitcoin. Its only value comes from the value given to it by users and the speculators who have purchased Bitcoins on the assumption that the value will go up over time.

The reality is that we don't have good answers to any of the risks I just outlined. This is a "virtual currency." It is five years old. It was created by an anonymous person or group. It has questionable legal status. It is not tied to any asset of any kind.

Bitcoin is pure speculation. But, because there is no theoretical value, there are no fundamentals to slow its rise. Despite the fact that Bitcoin could rise indefinitely, there are many other alternative assets, with sound legal standing and proven fundamental value.

I can't stop you from speculating on Bitcoin if that's what you want to do. But you should know that it could be today's riskiest investment.

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