Bitcoin

Every couple of days, when I log onto CNN's Money portal, I see articles about this new digital currency called "Bitcoin".

As I continue to use this website as a tool to learn and grow my investing knowledge as I try to reach a $20,000 savings goal, I'll need to do some research on these new trendy investing options.

So what exactly is Bitcoin?

According to Wikipedia, Bitcoin was "first described in a 2008 paper by pseudonymous developer Satoshi Nakamoto, who called it a peer-to-peer, electronic cash system. Bitcoin creation and transfer is based on an open source cryptographic protocol and is not managed by any central authority. Each bitcoin is subdivided into 100 million smaller units called satoshis, defined by eight decimal places. Bitcoins can be transferred through a computer or smartphone without an intermediate financial institution.

According to their website, Bitcoin is an experimental form of digital currency:

"Bitcoin is an experimental new currency that is in active development. Although it becomes less experimental as usage grows, you should keep in mind that Bitcoin is a new invention that is exploring ideas that have never been attempted before. As such, its future cannot be predicted by anyone."

Bitcoin has multiple "apps" that help you manage your "wallet". Bitcoin-QT, Multibit, Armory, Electrum, and Bitcoin Wallet are all multi platform apps that help you manage your digital currency.

After signing up, you receive an email address. Similar to Chase's Quick Pay, a user's email address is linked to the account and is all that's needed to make a payment to the user.

Bitcoin keeps popping up in my CNN Money newsfeed. 

At the most recent Birkshire group annual meeting, Warren Buffet and partner Charlie Munger said the following about Bitcoin:

He says doesn't know much about Bitcoin, the virtual currency that has been gotten a lot of buzz lately. Buffett's partner Charlie Munger said that he has no confidence that Bitcoin will become a viable meaningful currency. Buffett said he thinks the dollar will remain the world's default currency for years to come, perhaps forever. "Of our $49 billion, we haven't moved any of it into Bitcoins," says Buffett.

To me, that doesn't sound like a ringing endorsement from one of the world's most savvy investors.

In an April 11, 2013 article, Bloomberg's Matthew Zeitlin made the case that, due to it's volatile nature, you really can't count on Bitcoin as being the future of currency:

If you wanted to make the case for Bitcoin as a feasible and useful digital currency, yesterday wasn’t the best day to do so. According to Mt. Gox, the largest Bitcoin exchange, the currency started out at $230, spiked to $266, touched a low of $105 and then settled at just above $170 (it’s now $123). That’s, in the course of the day, a 15 percent jump followed by a 60 percent plunge off the day’s high and ending with a substantial loss.

When currencies can fluctuate substantially over short periods of time, merchants not only have to continually update their prices, an inconvenience and added cost typically borne by the customer, but they also are forced to become currency speculators, adjusting prices and inventory in accordance to data from a possibly hacked online currency exchange. Merchants who accepted Bitcoin payments yesterday morning were much better off than merchants who sold goods at the same price this afternoon.

So, looking at this from my point of view, I don't see the need to jump on the Bitcoin bandwagon right now (or even ever). 

Lessons I Think I've Learned:

Bitcoin has an odd way of tackling supply and demand. If there's a limited number of Bitcoins available, you would think that the demand would grow. But if the demand for Bitcoins isn't overwhelming right now, what's the point of owning one?

If Warren Buffet doesn't own it, neither should I.