Bitcoin investment issues

Although economists as of 2014 are still arguing, whether Bitcoin can be regarded as money, this has not prevented their being used as a medium of exchange. Bitcoin is used as a currency, with about 1,000 brick and mortar businesses willing to accept payment in bitcoins as of November 2013 and more than 35,000 merchants online. The bitcoin market currently suffers from volatility, limiting the ability of bitcoins to act as a stable store of value, which is condition 2 for a currency, besides condition 3 “being a unit of account, against which value an economy is measured”. At present, this appears in furthest reach given Bitcoin’s money supply problems (disappearance of large exchangers) and finite reserves, the arbitrary cap of 21 million.

Nevertheless, Bitcoin has become a target for speculators trading bitcoins as a speculative asset, an investment vehicle, and a network serving customers of international remittance business.

Price volatility

According to Mark T. Williams of Boston University, bitcoin is over 7 times as volatile as gold and over 8 times as volatile as the S&P 500. The extremely volatile bitcoin exchange rate has led people to question its ability to function as a currency. The Bitcoin Foundation contends that this is due to insufficient liquidity and claims volatility will lessen if its popularity continues to increase. Volatility has little effect on the utility of Bitcoin as a payment processing system. Volatility has damaged the ability of bitcoin to be a store of value; it has not hampered its function as a medium of exchange. Bitcoin volatility is linked to uncertainty about its long-term value per Forbes contributor Timothy B. Lee.

Alternative to national currencies

Bitcoin detractors and supporters have suggested that Bitcoin is gaining popularity in countries with problem-plagued national currencies because it can be used to circumvent inflation, capital controls, and international sanctions. For example, bitcoins are used by some Argentinians as an alternative to the official currency, stymied by inflation and strict capital controls. In addition, some Iranians use bitcoins to evade currency sanctions. A link between higher Bitcoin usage in Spain and the 2012–2013 Cypriot financial crisis has been suggested.
Mistrust in traditional financial institutions and central banks fostered by the financial crisis of 2007–08  has probably helped to bolster Bitcoin popularity.

Speculation and bubbles

Bitcoins are traded by speculators who want to profit on short to medium term price changes. A separate organization offers futures contracts against multiple currencies allowing speculators to short bitcoin. The European Banking Authority warned in December 2013, that the risks of engaging in speculation go beyond a potential loss of bitcoin value. Unable to find any intrinsic value, former Federal Reserve Chairman Alan Greenspan has called it a speculative bubble  as has economist John Quiggin. Two lead software developers of Bitcoin, Gavin Andresen^[90] and Mike Hearn, had warned that bubbles may occur. One financial journalist correctly predicted the bursting of one such bitcoin bubble in April 2013. Nobel Laureate Robert Shiller said that bitcoin “exhibited many of the characteristics of a speculative bubble.” Others reject the existence of bubbles and see bitcoin’s quick rise in price as nothing more than normal economic forces at work. 

Bitcoin as investment

One way of investing in Bitcoin is to buy bitcoins and hold them as a long-term, high-risk investment. FINRA, a United States self-regulatory organization, has warned that investing in Bitcoin carries significant risks. Bitcoins may be of limited value to unsophisticated investors. Risk hasn’t deterred all investors. The Winklevoss twins made a US$1.5 million personal investment and attempted to launch a bitcoin ETF.
Some investors, like Peter Thiel’s Founders Fund, which invested US$3 million, don’t purchase bitcoins instead funding Bitcoin infrastructure like bitcoin exchanges, companies that provide bitcoin payment systems to merchants, or bitcoin wallet services, etc. Investors also invest in bitcoin mining.

Money supply

Growth of the Bitcoin money supply is predefined by the Bitcoin protocol, and in this way inflation is kept in check. Currently there are over twelve million bitcoins in circulation with an approximate creation rate of 25 bitcoins every ten minutes. The total supply is capped at the arbitrary limit of 21 million, and every four years the creation rate is halved. This means new bitcoins will continue to be released for more than a hundred years.

Bitcoin value forecasts

Financial journalists and analysts, economists, and investors have attempted to predict the possible future value of bitcoin. Economist John Quiggin stated, “bitcoins will attain their true value of zero sooner or later, but it is impossible to say when.” In 2013, Bank of America FX and Rate Strategist David Woo forecast a maximum fair value per bitcoin of $1,300. Bitcoin investor Cameron Winklevoss stated in 2013 that the “bull case scenario for bitcoin is… 40,000 USD a coin”.  In late 2013, finance professor Mark Williams forecast a bitcoin would be worth less than ten US dollars by July 2014.

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