Was bitcoin designed to make commodity futures and speculative stock options look like conservative investments? You might gather this from recent headlines and news reports about wild fluctuations in the price of bitcoin since December. Is this relatively new digital currency worth the roller-coaster ride?
Bitcoin advocates say yes. They suggest the digital currency will replace traditional money — and this may eventually happen — but in the meantime, as with any revolutionary idea, there will be bumps in the road.
The oldest rare coin was minted in Turkey over 2600 years ago. This medium of exchange eliminated barter. This reliable system has been the standard for several millennia.
Bitcoin, on the other hand, is a peer-to-peer system that was invented less than 10 years ago; instead of coins or paper money, bitcoin is entirely digital. Digital coins, known as “cryptocurrencies,” are not backed by central banks or governmental agencies, thus adding to their allure, and potentially the nefarious.
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With minimal centralized regulation, digital currencies may experience big swings in value over short time periods. Bitcoin reached a peak price of $20,000 in December, and now trades just above $9,000 per bitcoin. A retailer who works on slim profit margins is unlikely to accept bitcoin if their modest profit could be erased in a day’s trading. While a few Fortune 500 companies accept bitcoin, it is mostly traded between other bitcoin enthusiasts.
Facebook recently banned advertising of cryptocurrencies such as bitcoin. Bank of America blocked clients from trading bitcoin. Governmental regulators have shown a keen interest, including central banks like the Fed, and taxing authorities like the IRS. Bitcoin transactions are private, and therefore hard to tax and regulate.
The most promising use of this new technology is “blockchain,” a digital wallet for cryptocurrency transactions; it cannot be changed or deleted. Blockchain can be used to record and document real estate transactions, not only in the U.S. but developing countries struggling with private property rights.
Most new ideas experience a speculative phase before moving to the mainstream, and digital currency is no different. Early adopters assume the greatest risk, and potential reward. Consumers should be careful and do their homework. If you don’t understand it, don’t invest.
Free markets and an unregulated internet will ultimately decide the efficacy of bitcoin, but if you choose to participate, buckle your seat belt and hang on.
Mark Daly is an investment management analyst and partner in the Perpetua Group. Mark@ ThePerpetuaGroup.com.