It has been a long time since Digital Markets Advisor has spoken about Bitcoin. We published a piece almost a year ago, 13th April 2013, in which we called into question the long-term worthiness of the asset and what its ability would be to maintain and create a framework for conducting transactions that would have the ability to be not only secure but act as a preservation tool and not merely a speculative product.
Little has changed in the past year and although the value of a Bitcoin remains relatively high, Digital Markets Advisor continues to doubt the ability of this virtual currency to become anything but a speculative asset. Bitcoin has shown almost no ability to become a currency that can be counted on as a form of public exchange between consumers and businesses in widespread transactions. Yes, there have been a few well publicized purchases using Bitcoin, but these sales have had the appearance of publicity stunts.
We recommend that as a true investment Bitcoin should only be used as a pure speculative trade, one in which the ‘investor’ should be prepared to lose a lot of money. Risk management via Bitcoin has not proven effective except to be ahead of news flow such as the recent failure of one of Bitcoin’s exchange formats – Mt. Gox.
While Digital Markets Advisor does not doubt the ability of software tech heads to create safer avenues for the use of virtual currencies long-term and in fact believes that we will see other ‘currencies’ created, we simply do not see enough evidence that suggests Bitcoin has effectively become anything but a speculative fancy.
Yes, one day in the future it can be counted on that someone will have enough funds to create a Virtual Central Bank in order to bring some foundations of secure exchanges between virtual and paper currencies, but that day has not arrived yet. Until people can literally use a credit card that has Bitcoin (or another virtual currency) value and have a sum deducted from their ‘account’ for the purchase of goods in a widespread format and have the ability to transact freely, the realm of virtual currencies will remain a land of folks consisting of ‘the fringe’.
And for Bitcoin aficionados that take our viewpoint badly, we simply ask them to show us how the relative value of Bitcoin is backed by anything other than via psychological perceptions. Yes, one could argue that some exchanges have issued futures contracts, some governments have accepted the ability of the currency to be used. However, no one has proven that the value of Bitcoin or any other virtual currency as of yet has anything but ‘notions’ supporting their values. Institutional mandates remain vague regarding Bitcoin from the likes of the Fed and its brethren, if not outright against the virtual currency.
While it may be actually be a sign that Bitcoin and other ‘virtuals’ have the attention of Central Banks and governments and folks may look at this in a merry way with the notion that the authority of Central Banks will be challenged, it remains to be seen who and what exactly would create a secure environment for the long-term health of Bitcoin and its value.
Simply put, Digital Markets Advisor remains critical of Bitcoin. While we have never been large fans of Gold except to say as an inflation hedge, it is a noteworthy physical asset. It remains evident that Bitcoin as a FX fixture is one for traders who have deep pockets and the ability to lose large amounts of money, while they wish upon the stars and the notion that demand for their currency will be driven by computer microchips.