Bitcoin, currency with a future?

A recent development in financial markets is the emergence of the virtual or crypto- currency, the best known of which is the Bitcoin. Virtual currencies appear to be splitting opinions, some see it as a dangerous bubble, others like the superintendent of financial services in New York, see it as a natural progression of the technological world we live in, whose benefits outweigh the risks.

When I published my year ahead, I regarded the Bitcoin as something I did not understand and therefore would stay away from. When I think of the Bitcoin I immediately think of the South Sea bubble of 1710, Tulip mania and the more recent Poseidon mining bubble. Most people are familiar with the first two, the Poseidon less so, unless you worked in the financial markets where the story is folklore.

What I have learned about Bitcoin, is that there are about 12.5 million Bitcoins in circulation with a collective value of $8bn at today’s prices, which makes it small fry in the currency world. A Bitcoin is a unique computer code, which is a secure transferrable asset. Unlike traditional currencies it does not have a Government standing behind it. But Bitcoin doesn’t have any fiscal policy either, which attracts investors to it given the limited quantity available.

A few shops in the UK are now accepting Bitcoins for goods, and entrepreneurs are creating virtual banks to store Bitcoins, the concept is building momentum. The attraction to the Bitcoin is the ability to move large sums of money across borders instantly, cheaply and potentially anonymously. Apparently, one will soon be able to use the Bitcoin in Las Vegas.

The Bitcoin is not the only virtual currency; there are almost a hundred other examples such as Litecoin, Dogecoin and Ripple. There are now websites that allow anyone to create their own virtual currency. Some put the recent demise of the gold price down to the emergence of the Bitcoin as speculators have been selling their holdings in gold and buying Bitcoins instead. I personally do not buy into that theory.

Recent issues have plagued the currency such as China’s government banning financial institutions from using Bitcoins, pending money-laundering charges against one of Bitcoin’s founders, and lastly, one of the largest trading exchanges in the world, Japan-based Mt.Gox, suspending customer withdrawals from Bitcoin due to fraud risk in transferring the currency.

  Source: bitcoincharts.com

Source: bitcoincharts.com

The South Sea bubble itself was a scam that many people lost a fortune, but it sparked in its wake a new breed of entrepreneurs; companies were created in that period that still exist today in some form. The Internet-era of the late 90s and early 2000s was a bubble, but from that came innovations and many successful companies that thrive today.

The Bitcoin may or may not be a bubble, time will tell, but in my opinion the invention of the Bitcoin will ultimately spawn a revolutionary way of exchanging goods and services. What will need to happen first, is for governments to find a way to support it. Will I be buying Bitcoins? No, and am I missing a great opportunity? Maybe, but I am happy to stick to investments that I can more readily understand the value and risk.

Posted on February 11, 2014 .