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Should you invest in Bitcoins or are they just Beanie Babies for nerds?

If you’ve never heard of Bitcoin, you probably will soon. Bitcoin is an electronic currency beloved by technology enthusiasts and privacy advocates that happens to be prone to sudden, huge run-ups in value.

The currency can be used to make purchases at a few online and brick-and-mortar stores — as well as the vast online black market of which the recently busted Silk Road was a part.

But what it’s mostly good for right now is speculating.

Three months ago, a single bitcoin would get you $121 on the open market. Yesterday it closed at $600, reaching an all-time midday high of $901. As you can imagine, speculators have been having a field day with Bitcoin, and some early adopters have quickly become very rich.

Undoubtedly some will see Bitcoin as a way to quickly double their money — and for a few, it has been. For instance, a Norwegian man who bought 5,000 BTC for about $27 dollars in 2009 and forgot about them recently sold them for $886,000 to buy anapartment in Oslo [3].

But I think it’s apropos that the largest Bitcoin exchange in the world, Mt. Gox, started out as “Magic: The Gathering Exchange,” a place for fans of the fantasy trading card game to exchange their cards. That’s because bitcoins, like Magic cards, Beanie Babies and baseball cards, have little real utility or intrinsic value. ¬†You can’t eat a Bitcoin, you can’t live in one, and unless you live in one of a few major cities, you can’t use them to buy anything locally, either. They can be used to buy stuff on the Internet, but very few merchants accept them even online.

This tweet from Brookings Institution economist Justin Wolfers sums up the problems with Bitcoin perfectly:

So without any real value, what are we left with? Well, we know how much the last guy paid for one. We know how much we paid for one if we have one. But where’s the value going? What’s it based on? Bitcoin fans like to point out that unlike things like baseball cards and Beanie Babies and even U.S. dollars, there are only a limited number of bitcoins that will ever be minted.¬†Bitcoins themselves are created by “miners,” really powerful computers that try to solve a complex math problem to unlock the next bitcoin. Eventually, the supply of fresh bitcoins will peter out, the total number of bitcoins is mathematically capped at a little under 21 million.

But Bitcoin’s value rests solely on the faith people have in its value. As much as people sometimes get spooked by the U.S. Dollar’s status as a fiat currency — essentially it’s backed by nothing but people’s faith in the U.S. government — at least the U.S. is real and tangible. It has land, businesses, and a government that can tax them, with guns and lawmen to enforce the Dollar’s status as “legal tender for all debts.”

Bitcoin doesn’t have any of those things. It’s very popular right now, but many people with giant trunks full of Beanie Babies moldering in their basement will tell you that people are inherently very fickle. As with many collectibles that can’t really do much for you if no one wants to buy one, people can fall out of love quickly. And that may leave a lot of people who put their wealth on the line to invest in Bitcoins wishing they could get their good ol’ low-tech bank notes back.

I don’t mean to trash Bitcoin and those that are enthusiastic about it. The currency has some really innovative features and its ability to make person-to-person payments instantaneously on a giant peer-to-peer network is genuinely cool [5]. But in terms of investing, they’re a sideshow to the main event of stocks, bonds and other more solid investments that build real wealth over time.

What do you think? Am I totally wrong? Do you think Bitcoin is the next big thing?

(Photo: Joel Telling)