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Kathryn Cave (Global) - Should You Buy into Bitcoin Now?

Public faith in conventional forms of currency has been dwindling for ages. Now Bitcoin's circulation has hit $1 billion and the value of each coin has shot through the roof. Is this currency today's ultimate investment? Or is the bubble about to burst?

 

Last year, as the Euro crisis began to hit Greece, a renegade band of locals in the port city of Volos started an alternative currency. This grass-roots initiative rapidly grew into a thriving network of individuals who bartered goods on an exchange system named TEM. In practice this meant people gained credit for products or services, and all transactions became a fair swap.

Before the2007 Northern Rock crisis left the British public queuing in the street to extract their life savings, systems like this would have seemed pretty unimaginable in modern Europe. Now, in the wake of Greece and Cyprus, mistrust in banks and governments seems quite normal. And like the Volos example, the obvious solution would surely be to return to a more naturalistic swapping system. However, things are not always as they seem.

In his Pulitzer Prize-winning book, ‘Lords of Finance: Bankers that Broke the World', Liaquat Ahamed addressed how one major cause for the Wall Street Crash was bankers' rigid adherence to the gold standard. This is interesting, because linking the amount of currency a country has in circulation to the amount of gold it has in its vaults may appear arbitrary and nonsensical to economists today, but if you take a truly simplistic approach it makes perfect sense. Gold is concrete, tangible and real, and like anything concrete, quantifiable (and barter-able), seems safe. Yet the notion was proved incorrect to disastrous effect.

This introduces both the appeal and the problem with Bitcoin...

 

The Bitcoin Revolution...

 

Bitcoin is a currency without backing, which circumvents the entire banking system. This is truly decentralised money independent of government and its taxes. It is a currency that exists entirely for private transaction, and in many key ways, it revolutionises money.

Over the last few months the press has been full of stories about Bitcoin because its value has rocketed. With a circulation of $1 billion announced last month, this currency has joined the ‘billion dollar club'. This places Bitcoin above over two thirds of companies trading on the NASDAQ and above more than 20 countries around the world. Many suggest this rapid hike follows the Eurozone bailout of Cyprus. But irrespective of the reason, as prices rise, the real question remains: is this a bubble waiting to burst, or should we all invest in Bitcoin now?

There has already been an awful lot written about how Bitcoin works, and how it is favoured by people who wish to stay out of the system, so I won't go into any of that here. The real issue surrounding Bitcoin, however, is whether recent developments show a true move towards a genuine use of this currency. A recent report in Business Insider elicited the opinion of Wall Street analyst ConvergEx Group Chief Market Strategist Nick Colas. His view was, "The reaction from clients has been pretty uniform: it must be a bubble. Too far, too fast, too new ... you get the idea." He states "the next big thing to watch out for will be whether mainstream businesses start accepting Bitcoin so the coins can be spent in more places."

Of course, it is hard to separate Bitcoin from the hype, but this is exactly what does seem to be happening. The Bitcoin Magazine lists a large volume of places the currency can be spent. And interestingly, whilst a lot has been made by the press about how Bitcoin can be used to order pizza there actually appear to a number of comestibles available. This includes Bitbrew which sells coffees and a company which calls itself ‘George's Famous Baklava'.

New partnerships also appear to be springing up left, right and centre. For example, Bitcoin has recently signed an agreement with Fulfillment by Amazon, a service which allows any businesses with inventory in Amazon's warehouses to sell the products (on their own websites), and have Amazon automatically ship them to the buyer's address. This certainly facilitates easy Bitcoin transactions for businesses. The first Bitcoin Hedge Fund launched from Malta in March. Plus the company recently gained $500,000 in seed funding and a partnership with Silicon Valley Bank, Coinlab, which clearly brings it closer to the US market.

Ben Davenport, a Silicon Valley investor who recently invested in BitPay, the Bitcoin payment processor wrote, "Now... we're getting to the size where an investment in an amazing, well-positioned team like the guys at BitPay makes a lot of sense, and will also ultimately help increase the overall Bitcoin adoption rate. I predict we'll see the VC flood gates open within 12-18 months - I'm just trying to be a little bit ahead of the curve there."

 

Opinion is Divided...

 

This week, Alex Herne of The New Statesman said, "I've written repeatedly that I think the current price of Bitcoin is the result of a volatile bubble - though I'm no more certain than anyone else as to when that bubble will burst. The faster the Bitcoin price rises, the fewer actual transactions you'll see being made with it. Insofar as there is a ‘real' price of the currency."

This is an important point because although Bitcoin may be making partnerships, hitting the headlines and gaining legitimacy, if one coin is worth three times what it was a month ago, who is going to want to spend it? I can't imagine anyone would fancy shelling out triple digits, for some baklava however delicious or famous it was. And this is the real problem with having a currency that is tied to nothing. It has no intrinsic worth and any rogue virus or hacker could wipe out your cash in an instant. On top of which, Cullen Roche on the Pragmatic Capitalist put it, "If Bitcoin were to grow to a point where it becomes a highly competitive form of money, but circumvents the laws, regulations and taxation of a system like the US banking system, my guess is that the US government will make it illegal for merchants to receive Bitcoins for payment."

Opinion is clearly divided across the media. This is clear not only in the articles written, but in the sheer wealth of comments these have generated. There was a thriving debate underneath one article in The Verge this week. This went from Fluidj who bizarrely claimed, "This is a pyramid scheme. And shame on The Verge for continuing to give it so much attention", to badasscat1 who stated, "If everyone bought into Bitcoins, the system would fall apart. The only thing pushing these prices higher are more people buying into it." Whilst Mick Fragger added more pragmatically, "I fail to see how you can describe something that has gone from $10 to $100 in unit value in the space of a few months as ‘stable'. It will come back down with a bump when the big money players who are controlling the market decide it's time to cash in."

Ultimately nobody knows what is going to happen next. This currency has been running for three years and over that time, like any new concept, it has garnered confusion, suspicion and uncertainty. In a lot of ways it breaks all the rules. It does seem extremely unlikely that Bitcoin will ever overtake a standard monetary system, but it also seems likely that Bitcoin is here to stay. Maybe the real question should be: do we buy into Bitcoin now and risk the bubble bursting? Or wait for the market to stabilise and for this to become a more widely used transaction... and risk missing out on what could be an incredible investment opportunity?

 

By Kathryn Cave Editor at IDG Connect

 

IDG Connect published a two-part overview of Bitcoin in 2011, and have more recently published a piece on the future of Bitcoin in Africa.

 

 

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