Should You Invest in Bitcoin?

Is this digital currency the wave of the future, or a craze to avoid?

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.

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.

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But he also sees a darker side of Bitcoin. As Comisky points out, the anonymous nature of the digital currency means there is scant evidence that you've used it. With conventional money, Comisky says, "there's a paper trail. You make a deposit, and you have a copy of the item, and the money's in your bank account, and a government agency can subpoena that if they need to."

[Read: How to Spot Counterfeit Money.]

But with bitcoins, because of the almost anonymous nature of the money, "If you're a bad guy, there are a lot of uses for it. You can use bitcoins for tax evasion, launder money with it or use it for narcotics," Comisky says.

Indeed, last year, the Federal Bureau of Investigation came out with an unclassified report, which was immediately leaked online, asserting that at least one online service, a market place called Silk Road, has taken bitcoins as payment for illegal drugs.

Dodi Glenn, director of AV Labs at ThreatTrack Security, a Clearwater, Fla.-based firm that specializes in helping identify and stop sophisticated malware and cyber attacks, points out another problem. "Bitcoin-targeted malware, like viruses and Trojans, can do several bad things to your PC," Glenn says. "For example, hackers can steal account information, such as your username and password, which gives them access to your Bitcoin wallet. They also can hijack your computer and use it to help spread their Bitcoin-stealing malware to other PCs."

Of course, malware can get access to a bank account, too. But banks will give you your money back. "Bitcoins aren't insured with an agency like FDIC, or with an actual bank," says Glenn.

Even if you're confident you are hack-proof, and you're a perfectly good citizen with no interest in money laundering or narcotics, you may wonder why you'd want to pay for anything with a bitcoin. That's the million-dollar question—sorry, the million-bitcoin question. Right now, you can't buy much with bitcoins. It's estimated that only about 100 retailers throughout the world accept them, all arguably obscure businesses like PhoneSomeone, an Australian telephone wholesaler of second-hand equipment, and Grass Hill Alpacas in Haydenville, Mass.

Still, the appeal for some is that with Bitcoin, you can pay friends and family on the Internet for free (although in some cases, there may be a small fee) and without a lot of hassle, once you have digital money in your Bitcoin online wallet. A friend can scan your cell phone with his cell, or you can touch the two smartphones together, provided they both use Near Field Communication technology, and pay each other that way. In fact, you can pay anyone anywhere in the world, within about 10 minutes, according to Bitcoin's website.

But it may take a while for consumers to get comfortable using bitcoins. For instance, the New York City bar, EVR, recently gained a lot of press for being the first New York bar to accept bitcoins. As CNN reported in mid-April, at its then-current value, a $15 martini cost .08 bitcoin. Wrapping one's head around what would be a fair cost for a purchase with bitcoins may take some time.

As the New York bar scene suggests, some businesses and consumers are embracing bitcoins, as are some investors, who clearly hope they can buy low, or low enough, and sell later. Currently, bitcoins aren't pegged to the dollar or any international currency, and their value fluctuates—sometimes wildly. In the past, it has traded for less than a penny. For a time in 2012, each bitcoin was worth less than $5. As of this writing, the exchange rate for 1 bitcoin is 140 American dollars; by the time you read this, it may well be different. You can find the current exchange rate at bitcoinexchangerate.org.

[See 10 'Digital Utilities' You Need Every Day.]

In other words, this isn't an investment for the cautious investor, or anyone who doesn't have money they can afford to lose; nobody should feel confident about putting their life savings into bitcoins. On the other hand, if digital currency isn't here to stay, it's nonetheless making a valiant attempt. It's worth noting that there are other cryptocurrencies vying to be the next Bitcoin, notably litecoins (www.litecoins.org) and PPCoins (www.ppcoin.org).