Is Bitcoin a Savvy Investment Now or a Sucker Bet?

Donald Hastings
December 16, 2014

Bitcoin, the first global digital currency to see widespread use, has experienced much volatility over the past two years. In 2013, Bitcoin shot out of obscurity with an over-8,000 percent price increase to a peak of around $1,147 in early December of last year. But in 2014, Bitcoin is down roughly 52%, currently trading around $337 on the BTC-e exchange. Its price has wildly fluctuated at times from speculation, hacks, platform bugs, and government regulation. The consensus for next year seems to be that investors should expect more of the same, which begs the question, is an investment in the digital currency now worth all the risk and expected volatility to come?

One major concern for Bitcoin going forward is the threat of future collapses of large, unregulated Bitcoin exchanges, such as Mt. Gox. Problems like these create the perception that large holdings of the digital currency can simply evaporate overnight, without any underlying means for recovering such assets. Another significant concern is that the current demand for Bitcoin is still believed to be driven in large part by shadier usages of the currency—such as for evading taxes and buying contraband like drugs or weapons. This illicit demand could disappear as governments move to limit the use of Bitcoins to facilitate illegal transactions.

Yet despite the multitude of problems Bitcoin has recently faced, there is still a tremendous amount of private equity and venture capital money being put into it to create a better, more reliable business model. This points to significant upside for investors who are willing to accept the wild price swings in the short-term. In fact, volatility can be expected for almost any new asset class as it struggles to gain acceptance and clear regulatory hurdles. While Bitcoin has experienced more than its fair share of problems lately, consider the following: Bitcoin has a relatively low circulation value now, but theoretically, with widespread adoption, the circulation value could be 100x–to-1,000x what it is today. Thus, notwithstanding all of the current problems weighing down the digital currency, it is easy to see why many are still betting heavily on its success.

Ultimately, given all of the benefits that a digital currency can bring to the marketplace, there is reason to believe that this new asset class will only grow in the coming years. The question is whether Bitcoin will remain at the forefront of this currency revolution.