A bitcoin warning you should know about

By Investing Basics Consumer Reports

If Google Trends is any indication, many of us have already consigned bitcoin and other virtual curencies to the trash heap of investment history, along with auction rate securities and the Pets.com sock puppet.

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For the rest of us, the Consumer Financial Protection Bureau has issued a "consumer advisory warning consumers about the risks of virtual currencies" such as bitcoin. Most of the advisory discusses the risks consumers are exposed to, from criminals such as hackers and scam artists, to transaction costs that would make banks and credit card issuers blush. In addition, the CFPB made passing reference to bitcoin's stability, or lack of it, as a store of value.

Read Consumers Union's take on bitcoin at DefendYourDollars.org.

Of course, some investors—ok, speculators—may actually be attracted to the "Wild West" mentality of virtual currencies that the CFPB is warning about. Early adopters who were mining bitcoins from their parents' basements in 2011 made themselves quite a bit of (taxable) money —those first bitcoins electronically mined three years ago increased in value from $20 to more than $1,100, before losing half of that peak value. More recently, the market for bitcoins has somewhat settled, trading at a little less than $600 for most of the last three months.

But even as an investment, bitcoin is still a long way from prime time. A bitcoin based exchange-traded fund, courtesy of the Winkelvoss twins, has been in the registration stage with the Securities and Exchange Commission for months. But even if the ETF (which, if traded, will have the ticker COIN on the Nasdaq Stock Exchange) comes into being, it's far from clear what an investment in what is essentially an exotic foreign currency does for a portfolio. For individual investors, one rarely sees model portfolios with foreign currency positions, not even in those with healthy doses of alternative investments such as gold and master limited partnerships.  

—Chris Horymski

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