What's the Deal with Bitcoin? | Moneta | Investment Advisors

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We are starting to get more and more questions surrounding Bitcoin and I thought some of you might find this article interesting reading from a professor at NYU.

http://www.bloomberg.com/news/2013-12-23/bitcoin-more-speculative-than-real-currency-study-finds.html

I particularly enjoy the following line, it “does not behave like a currency at all” and has hallmarks similar to some Internet stocks that collapsed in the 1990s.

Bitcoins are a created currency that was created by someone anonymously. There is a finite number of Bitcoins that can exist, therefore the allure to people who view the money printing policies of many governments to be wrong.

The price (in US Dollars) of Bitcoins has gone from less than $100 to over $1200 in the last 12 months alone(it currently is around $650). This is why so many people are talking about it. It is also extremely volatile. The price routinely can have drops of over 20% and has dropped over 50% twice in the last 12 months alone.

Earlier this month, China basically stated that it is not a viable means of conducting business and the price of Bitcoins dropped 20% in one day. Considering the volatility, I refuse to believe that any prudent person who is afraid of the value of the USDollar would go into Bitcoins. Even if I was certain that the US Dollar is going to be devalued, the possibility of Bitcoins dropping by more than 20% in a day is drastically still more risky than holding my current currency.

Looking at one of the online “exchanges” for Bitcoins this morning shows quotes based on the US dollar ranging from $570 to $699. I have a hard time taking anything seriously with that type of spread. That is like a pink sheet stock – and that probably isn’t fair to pink sheet stocks!

Based on what we know today, it is hard to call this thing a currency and to view it as anything but speculation. That doesn’t mean that some people won’t make money in Bitcoins, but that there is a significant amount of risk associated with it.