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Bitcoins – Are they right for you?

Before we can answer the question, we should probably spend a moment to answer another question; what is a bitcoin?

Bitcoins

Bitcoins are a virtual currency invented by a mystery programmer in 2009. By virtual, we mean that they do not exist in physical form. They can’t be found in the form of metal coins, gold bars, or paper bills that you can see, smell, or touch. They only exist in computer accounts called wallets. In that sense, each coin is an electronic record that is stored on a computer. If this sounds a lot like your online bank account, you are beginning to understand the concept of bitcoins.

There is one great big caveat to keep in mind when thinking about bitcoins. The electronic record of the money in your bank account represents real dollars that are backed by the U.S. government which is insured by the FDIC. There are no similar protections for bitcoins. They only have value because someone is willing to give you hard currency or products in exchange for them. The moment people believe that bitcoins have a reduced value or even worse, no value at all, bitcoins become worthless.

To spend a bitcoin, the record is transferred from one wallet to another in an anonymous electronic transaction. Because no one knows who owns each wallet, no one knows who actually owns bitcoins or who is spending them. For this reason, bitcoins have become popular in illegal transactions. You can think of exchanging bitcoins as being like electronically handing cash from one wallet to another without anyone knowing who owns each wallet.

Bitcoins are like cash in other ways as well. For instance, they can be lost. One early buyer of bitcoins lost more than 7 million dollars by accidently throwing the computer hard drive containing the records of his electronic wallet into the trash. They can also be stolen by computer hackers and unlike your bank account, if someone steals your bitcoins, no bank is going to reimburse you for your loss.

So, let’s get back to our original question. Are bitcoins for you? For most people, the resounding answer is NO! The entire concept of virtual currency is in its infancy. For the moment, investment in bitcoins is pure speculation. You could make a lot of money or you could lose every penny. Just like any speculation, you have to ask yourself if you can afford to lose the money you invest. Most of us can’t afford to lose our hard earned money. For the average consumer, bitcoins or any other virtual currency is probably not a good choice until they become main stream.

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