Bitcoins as an Investment?

What do you think of when you hear the word "investment"? You may think about education, a car, a home, a bank account, the stock market, etc. My simple definition of an investment is anything you acquire for the purpose of using to better your life. A financial investment would be anything you acquire for the purpose of generating income. The best financial investments are the ones that generate income without needing you to be present. The best investment overall is a family. But this post is about financial investments.

Most people don't know enough about investments to be personally secure in spending a substantial amount of money on a financial investment. For these people (99% of the population, including myself), there are wonderful investing resources available. One to watch is the Fisher Investment twitter account. Their twitter feed is filled with good, real-time information on investing. For more information, see Business Week. There are also many other resources.

Bitcoins have become something very interesting to me. Several weeks ago, just for fun, I was going to buy $1,000 worth of bitcoins at $1.2/coin. I went to Mt. Gox, the most popular bitcoin exchange and tried to buy the coins. Turns out everything looked super sketchy, and they took a heavy transaction fee of 7%. Out of laziness and slight fear, I decided it wasn't worth it. Two weeks later bitcoin charts showed that the value of the coins skyrocketed to $8.5/coin. I face palmed at the fact that I would have made a cool $8,000 on that very risky investment.

In a way, most investments are similar to gambling. Gambling looks fun because it's like playing investor at high speed. Instead of waiting days, months, or years for an investment to pan out, the investor/gambler gets to see his investment play through in real-time. And the odds are typically double or nothing. What sets most investments apart from gambling is the risk factor involved. Most gambling is extremely high risk, where at very best you have a 50% chance of doubling your money. Most of the time your odds of getting an increase are far less than half. Casino's are masters of getting people to invest, and they use all kinds of tricks.

With my thought on buying bitcoins, I was going to get them at $1.2/coin and I fully knew they may ultimately be worthless. So I went into that investment thinking the downside is I lose everything, and the upside is indeterminate. Because the upside wasn't tangible enough at the time, I wasn't compelled to take action and actually follow through on the investment.

I have a few friends who are fortunate enough to have excessive income to blow on fun investments like bitcoins. We've calculated that the ROI on mining bitcoins over the next year could be incredible (or terrible, of course). The best thing about investing in bitcoin mining is that you need high end computer equipment which will hold its value over the life of the operation. So the downside is you lose roughly 20% of your initial investment in the first year (because you can sell your equipment), and the upside is both predictable (as far as the mining algorithm goes) and unfixed (as far as the price of bitcoins). I hope they make a ton of money. =]