Call it “bitcoin fever” or, as one financial writer put it, “FOMO”—fear of missing out. As investors head into a new year, bitcoin is generating tons of excitement and curiosity. Some folks want a piece of the action, while others, like billionaire investor Warren Buffett, refuse to touch bitcoin, although he admitted in an interview that it’s a “very effective way of transmitting money.”
Buffett has his reasons for warning against bitcoin, one being that it’s “not a value-producing asset,” in his opinion. Nevertheless, bitcoin has been on a serious roll. According to the website CoinMarketCap.com, prices have gone from roughly USD $100 per bitcoin in mid-2013 to over $13,400 on January 11. As recently as December of last year, prices topped $19,000.
It’s this level of volatility that has financial experts comparing bitcoin to the dot.com and housing bubbles of recent memory. Not surprisingly, for every person who believes in the potential of bitcoin (and there are many), there are others who won’t touch it with a 10-foot pole. Some experts, including Nobel Prize-winning economist Joseph E. Stiglitz, go even further and want bitcoin banned outright. “It doesn’t serve any socially useful function,” Stiglitz told Bloomberg Television last November.
What Is Bitcoin?
There are a lot of misconceptions about bitcoin, with many people interested in making a quick profit without knowing what they’re investing in. As one financial planner told Medscape off the record, “I bet if you ask 10 investors in bitcoin to define it for you, you’ll get 10 different answers.” (Because bitcoin prices remain highly volatile, the firm this planner works for has instructed its advisors not to discuss the cryptocurrency with their clients.)
The first thing you need to know about bitcoin is that it isn’t a physical “coin” that’s going to jingle in your pocket as you walk down the street. Those coins don’t exist. Bitcoin is a virtual currency known as a “cryptocurrency” that’s traded entirely online, without the benefit to investors of any sort of regulation from the US Securities and Exchange Commission (SEC) or foreign banking authorities.
Bitcoin advocates are quick to point out, however, that all transactions are logged into an electronic public ledger, which helps ensure their authenticity and—theoretically, at least, with so many people watching—prevent fraud. In addition, the number of bitcoins in circulation will eventually be capped, which means that there will be a finite supply. That “scarcity,” if you will, may affect prices in the future, but right now bitcoin’s momentum is being driven largely by hype.
Bitcoin, which has been criticized as a vehicle for money laundering and other illicit transactions, received a measure of legitimacy when two Chicago-based exchanges launched bitcoin futures, which are being monitored by the US Commodity Futures Trading Commission. Without getting into too much detail, futures are essentially a way to speculate on which way an asset’s price is likely to move. That said, bitcoin and other cryptocurrency exchanges are largely unregulated, and investing in futures—any sort of futures—requires a certain amount of knowledge and sophistication that’s generally beyond that of the typical individual investor.