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Anorak | There are bad Bitcoin investments and then there are terrible ones

There are bad Bitcoin investments and then there are terrible ones

by | 26th, September 2013

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YOU can mix and match these around either way you like: one is fairly obviously a scam and the other one just doesn’t make any sense in any financial manner. But amazingly, the one that doesn’t make any sense is also the one that’s entirely legal. So go figure, hunh?

For those knew to the idea of what Bitcoin is it’s a purely imaginary currency. It lives as bits and bytes on the world’s computer networks. There are those who think that it’s going to be the next big thing, a currency not controlled by any government. There are also those who regard it as a passing fad and not really good for anything very much. But, given that it’s fashionable there are people crowding around it and trying to make a buck off it. One of them is this one:

 Back in August, weird ads began appearing for something called the Bitcoin Robot that purported to earn massive profits by making hundreds of small transactions a day in the virtual currency, a version of the lucrative high-frequency trading done on Wall Street.

You know how these things go: stick together a few currently fashionable buzzwords and people will send you money.  High frequency trading has everyone all of a twitter at present, so does Bitcoin, so offer people software and a system to allow them to do high frequency trading in Bitcoin. Except, sadly, it just doesn’t work: it takes 30 minutes to conclude a Bitcoin transaction (either purchase or sale, into or out of Bitcoin from US$) so you simply cannot do leaping in and out of the market hundreds of times a day.

Better luck with the next scam guys.

Then there’s the entirely legal and serious one:

Bitcoin Investment Trust is basically exactly the same thing as the Winklevii’s bitcoin ETF, only it doesn’t need SEC approval — it’s limited to accredited investors. (But it can still be marketed in public, now that the general solicitation ban has been lifted.) That means it’s even more problematic than the Winkleproduct — it has all the same downsides, plus added illiquidity! If you buy into this trust, you still can’t do the single most useful thing that anybody can do with bitcoins, which is sell them or trade them. (Bitcoins are a combination of currency and commodity; this trust strips out the interesting bit, which is the currency part, leaving just the stupidly speculative commodity aspect.) You still have to pay a fee of 2% per year to SecondMarket for all the work they’re doing sitting on your bitcoins. And then, if you ever do decide to sell, you have to pay another 1.5% fee to get out. On top of that, if you buy into the trust after January 1, you’re also going to have to pay a 1.5% fee to get in.

But legal and serious though it may be it’s still a terrible investment. Because if you want to invest in Bitcoins all you’ve got to do is go and buy some and sit on them. ~For that’s all this trust is going to do: it’s not going to be trading them, arbitraging them, using them: it’s just a great big wallet with some Bitcoins in it. And what’s the point of paying people 2% a year when you can do exactly the same thing yourself for free?

Photo: In this April 3, 2013 photo, Mike Caldwell, a 35-year-old software engineer, looks over bitcoin tokens at his shop in Sandy, Utah. Caldwell mints physical versions of bitcoins, cranking out homemade tokens with codes protected by tamper-proof holographic seals, a retro-futuristic kind of prepaid cash. With up to 70,000 transactions each day over the past month, bitcoins have been propelled from the world of Internet oddities to the cusp of mainstream use, a remarkable breakthrough for a currency which made its online debut only four years ago. (AP Photo/Rick Bowmer)



Posted: 26th, September 2013 | In: Money Comment | Follow the Comments on our RSS feed: RSS 2.0 | TrackBack | Permalink