Bitcoin: Value, Volatility, and Risk

Bitcoin and other cryptocurrencies, such as Ethereum, have gained increased media exposure and investor interest in light of their substantial price gains and their involvement in recent ransomware attacks in 2017.

Bitcoin is intended to be a more seamless form of value transfer that is sometimes compared to gold given that there is a finite amount available. The comparison is tenuous, however, given that gold is a physical commodity, while bitcoin is electronic.

When evaluating these currencies as investments it’s important to note their history of extreme price swings relative to the U.S. dollar. For example, consider someone who purchased Bitcoin after it peaked in late 2013. Let’s assume that good timing allowed them to purchase at $533.71, a local valley in price on December 17, 2013. From that purchase date, gains would have quickly approached 70% but would then have faded almost as fast. For a period of nearly two years (August 2014 – May 2016), the owner would have held the bitcoins at a loss. And, for ten of those months (December 2014–October 2015), the loss would have been between 40% and 60%. If life circumstances, or simply a fear of further losses, led them to sell at nearly any point prior to May 2016, they would likely have done so at a potentially significant loss.

There are a number of factors that impact the price of bitcoin, including headline risk, government involvement (see our previous discussion here), and investor perception of value versus physical currencies. Headlines involving security breaches, high profile bitcoin exchange insolvencies due to hacking, and foreign government intervention have produced some of the most extreme price swings thus far. And, even though bitcoin has managed to hold most of its year-to-date gains in 2017, risks remain high.

For bitcoin to gain wide acceptance as a viable unit of value transfer, it must overcome a number of hurdles. Most notably, clarity concerning government regulation of the currency and proven resilience to hacking attempts. These issues will likely take a lot of time and effort to overcome, meaning heightened volatility will likely continue as cryptocurrencies look to gain wider acceptance.



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