Investing in Bitcoins,,

- By Mr. Asad Dossani, Author, The Lucrative Derivative Report

Bitcoins have made headlines around the world due to their increased use & popularity. Recently, the Reserve Bank of India (RBI) has warned against the use of bitcoins due to risks of money laundering and cyber security.

In response, a number of Indian bitcoin operators have suspended operations temporarily or / closed down.

What is Bitcoin?

Bitcoin is a virtual currency. It is maintained by a network of computers that record transactions, and control the supply of available currency.

The currency is not backed by any government, and many users view it as an alternative to national currencies. There are a limited number of retailers that accept bitcoins as payment, and they are often used for cross border transactions.

Mr. Asad Dossani

In recent months, trading in bitcoins has increased dramatically. This has caused the value of bitcoins to be extremely volatile. In 2011, the value of bitcoins fluctuated between $ 0.30 and $ 32.  In 2013, bitcoins have peaked at over $ 1,100. Today, bitcoins are trading at about $ 800. These price movements indicate extreme volatility, much more than any other commonly traded financial asset.

The reason for the extreme volatility is that there is a high level of regulatory uncertainty over the use of bitcoins. In addition, even without legal issues, there are questions as to whether companies and individuals will actually transact using bitcoins on a large scale.

But by far the biggest hurdle is regulatory, and many governments around the world are seeking to curb the use of bitcoins.

Does it make sense for an investor to consider bitcoins?

Unless you want to be exposed to very high risks, it is a bad idea to invest in bitcoins right now. This is due to the high regulatory risk. If enough regulators curb the use of bitcoins, then the currency would fall to zero value very quickly.

For those who are interested in bitcoins, the best thing to do is to wait until the regulatory environment settles down. Over the course of the next year (2014), we can expect countries to issue regulations on virtual currencies. Once this is done, there would not be such a regulatory risk on bitcoins, and then we can consider investing in them.

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