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Bitcoin Is a Short-Term Trade, Not a Currency Investment

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Bitcoin may be the topic de jour for hedge funds looking for high return, short duration trade ideas, but perhaps not for that much longer. Admittedly, the price chart alone is enough to get investors and non-investors alike taking a closer look. Just looking is fine, though touching could prove disastrous.

Currently trading at 7,207 bitcoins to the dollar, the run up has created a frenzy of trading activity and interest. Supporters tout it as all alternative currency for a digital era, and fund managers consider it a new asset class. Next stop for bitcoin, they say, is the 10,000 mark.

However, I just can't see how bitcoin is anything more than blatant speculation. Now, there's certainly nothing wrong with speculating, so long as the person throwing dollars at bitcoin is aware of what exactly they are doing, which is akin to gambling.

The so-called investment merits have yet to convince me. Needless to say this isn't where I'd advise putting one's nest egg.

Bitcoin as a Currency

I actually don't take issue with people considering bitcoin as a private currency. Proponents consider it a means of transacting and some even believe it to be superior to government-issued currencies given that blockchain prevents large devaluations. Where treasuries can print with abandon (with the proper approvals in place), creating paper money that isn't worth the paper it's printed on, blockchain keeps bitcoin from entering into such a scenario.

It's not a bad point. Although, the decentralization of blockchain raises some complex questions about security that I don't pretend to fully understand.

So, from a transactional standpoint, I have no particular concerns. So long as parties and counterparties agree on pricing and bitcoin equivalents, I don't see why bitcoin can't be used in lieu of say, U.S. dollars.

Where the issues arise for me, is from an investment standpoint.

Bitcoin as an Investment

Here's the rub, even if an increasing number of people adopt bitcoin and start to use it for an increasing number of transactions, how does the appreciation from the underlying investment in bitcoins come to pass?

Some point to a supply and demand imbalance. Namely that demand for bitcoins will continue its upward ascent. But at some point-and it may not even need to get to that 10,000 bubble territory-there will be people that feel valuation is too high. There's a relative context to currencies. If you're going to consider bitcoin a proper one, then it has to play by the rules as other fiat currencies.

This is to say that as bitcoins increase in value, people will more carefully weigh the purchasing power of a bitcoin against other major currencies. The market dynamics at work are such that the same volatility that has garnered bitcoin so much attention as of late, will be the same aspect of it that causes investors and users to reevaluate its merits as a currency (stability is generally preferred) and an investment.

It's overly simplistic to assume that bitcoin will somehow exponentially increase in popularity in the future, wherein demand will completely outstrip supply, thus sustaining the boom in price. That just doesn't hold much water.

Bitcoin Competitors

On a final note, there are at least eleven other digital currencies out there with a unicorn-like one billion dollar valuation. The barriers to entry are low, and no one currency has dominated to the point of a moat. So, there's no telling how many new alternative currencies could take the market by storm. These things are impossible to predict seeing as human behavior is just that.

This time next year, it could be Hipcoin or Ditcoin or anything else that catches peoples' fancy.

There just isn't a substantive reason for continued appreciation of bitcoin.

As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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