The Potential and Risks of Bitcoin Investment
With a 91% year-to-date gain on the books as of today, Bitcoin has emphatically shown this year that rumors of its death are widely exaggerated. But the factors behind the gains show why the cryptocurrency remains a highly speculative play, albeit one with a big potential payoff.
After trading as low as $358 early in the year, Bitcoin more than doubled over the next five months, with a big portion of the gains coming through a parabolic rise occurring between late May and mid-June. Bitcoin retreated over the following six weeks, but has been steadily rallying since, and on Wednesday topped $800 for the first time since February 2014. It now trades at $823.
The gains have been attributed to several different factors. The Brexit vote -- both in terms of the financial volatility it caused for the U.K., and the fears it induced about the Eurozone\'s stability -- certainly ranks high on the list. That said, it\'s worth keeping in mind Bitcoin\'s giant mid-year surge happened before the June 23 Brexit vote (admittedly amid rising fears of a "Leave" vote) rather than after it.
Donald Trump\'s election, and the fears it stoked about a Trump administration potentially pursuing destabilizing economic and fiscal policies, is also considered a factor. Bitcoin is up 16% since Nov. 8, though as with Brexit, some Trump-related Bitcoin buying appears to have happened before the election.
Then there\'s India\'s decision last month to remove all 500- and 1,000-rupee notes out of circulation in an attempt to crack down on "black money." Local Bitcoin purchases have surged since the move, and have often involved sizable premiums to standard market prices. And more recently, Bitcoin demand in neighboring Pakistan has jumped after the country\'s Senate recommended banning its 5,000-rupee note.
It\'s also hard to overlook the role Chinese Bitcoin buying has played, as locals worried about government capital controls and anti-corruption efforts use Bitcoin as a vehicle to move money out of the country. And with Bitcoin having a long history of witnessing big price swings, speculators betting one or more of the aforementioned trends will propel Bitcoin even higher appear to have jump in.
The obvious common thread between all of the ascribed culprits outside of the last one: Bitcoin is seen as a hedge against financial volatility and instability among those holding substantial amounts of traditional cash. In a lot of these cases, it seems as if purchases were made merely due to the fear that things could go haywire down the line, rather than any real certainty that they would do so. And if such fears prove unfounded, Bitcoin enthusiasm among such buyers might quickly wane.
It\'s also worth keeping in mind what isn\'t seen as a big factor behind this year\'s gains: Strong demand for using Bitcoins to buy actual goods and services. Though Bitcoin bulls have long argued the cryptocurrency\'s ability to enable transactions with far lower processing fees than credit cards would help it gain a following, and though online merchants such as Newegg, Overstock (OSTK) and Expedia (EXPE) began accepting it, all signs point to Bitcoin usage for real-world transactions being limited. Indeed, some of the merchants who once supported Bitcoin now no longer do so.
And Bitcoin, of course, is by no means the only option for hedging against monetary uncertainty. Precious metals, for example, have long performed this role.
At the same time, Bitcoin\'s security and privacy, along with its ability to be easily accessed anywhere on the planet via digital wallets, clearly has an appeal among some safe-haven seekers.
Moreover, even after this year\'s gains, the total value of all Bitcoins in existence is still less than $13 billion. That\'s equal to less than 0.1% of the U.S.\'s M2 money supply, and couldspell big further gains if Bitcoin is embraced as a hedge/safe haven in a large way.
But those looking to bet on Bitcoin should have a good understanding of what they\'re getting into. The factors that move Bitcoin prices are in many ways quite different from those that move traditional currencies, and bring with them a fair amount of risk.