Bitcoin has a lot of labels — cryptocurrency, alternative currency, digital currency, you name it.
But to some, Bitcoins are best described as a gigantic bubble.
Bitcoin prices rose above $1,000 last week, and for a brief time one Bitcoin was worth more than one ounce of gold. That sparked yet another heated debate over whether the digital money is a decent speculative investment, a legitimate currency or just plain crazy.
My two cents — or two Bitcoins, if you will — is that the digital currency is highly volatile and highly speculative.
Which pretty much puts it on equal footing with gold.
Bitcoin Prices Top $1,000
Bitcoin is derided as a joke by many in the blogosphere, likely because they don’t truly understand the motivations behind people who buy the alternative currency.
Yes, there’s undeniably a speculative element to Bitcoin buyers, as there is with any item that rises fast in value — from stocks to real estate to Beanie Babies.
But there’s a legitimate undercurrent to talk about Bitcoins and that is what’s really providing a floor on Bitcoin prices. Take a look at some of these developments:
- The U.S. Justice Department and the SEC consider the digital currency platforms “legitimate” financial services, according to representatives from both agencies
- The Winklevoss twins of Facebook (FB) fame are launching an exchange-traded product that provides investors a way to play Bitcoin prices the same way the SPDR Gold Trust (GLD) follows gold prices.
- According to reports, Chinese Internet stock Baidu (BIDU) has started talking Bitcoin. Space flight company Virgin Galactic also takes Bitcoins. And while most merchants you hear about are small e-commerce sites, legitimate businesses are increasingly providing a way to spend Bitcoins like real currency.
All this might not “prove” Bitcoin will stick around forever, but it makes a compelling case for the digital currency as some kind of alternative to cash and online payment solutions.
The Trouble With Bitcoin Remains
Now, don’t think this is a ringing endorsement. For the record, I’m pretty unimpressed with gold investing and consider it one of the most counterproductive corners of the market.
Yes, gold is “money,” so it can’t go to zero like stocks can, but it certainly has potential to crash and burn. The precious metal went from $850 an ounce in January 1980 to a low under $400 an ounce in July 1981. And more recently, gold prices have crashed from almost $1,900 an ounce in September 2011 to about $1,250 currently.
Yes, gold is a hedge against inflation, but so are many other investments. (And by the way, inflation has been a non-issue for five years running.)
Yes, gold is an alternative to the system of government-sponsored “fiat money,” but if your goal is to live off the grid and off the books in case of an economic disaster … well, you probably should be working on your bunker right now instead of surfing the web.
These challenges all remain for Bitcoin. And in fact, they are probably more amplified considering Bitcoin is wildly more volatile than gold right now.
Furthermore, Bitcoin has a lot more trouble making the argument that it is a hard asset — since it doesn’t exist in the real world, only in digital form. That means should disaster strike the global economy or U.S. telecommunications infrastructure, your Bitcoins will be at best inaccessible and at worst worthless.
And let’s not forget that the digital storage of Bitcoins makes the currency ripe for digital theft and fraud. Earlier this month, a Chinese Bitcoin exchange “disappeared,” taking more than $4 million in Bitcoins with it. This was just days after a hacker stole $1.3 million in Bitcoins from an Australian online bank.
But despite the challenges, Bitcoin haters should admit that there is a visceral appeal for an alternative currency right now — and that this digital payment and investment vehicle is in the right place at the right time.
That might not guarantee investors who buy Bitcoin at $1,000 will make any money. But it does mean Wall Street might have to get used to the currency being around for a while.
More on Bitcoin
- Bitcoins have “legitimate” benefits. (Bloomberg)
- Has Bitcoin gone establishment? (The Slant)
- So, you made a bundle in Bitcoin. What about taxes? (Forbes)
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.