Bitcoin: Is it really a “currency”, an “investment” or just a gamble?

Bitcoin’s price reached that of gold’s ($1250) on December 4th, offering a year-to-date return of 9,159%. Central banks and regulators started paying closer attention to the “currency” as soon as its price growth accelerated amid publicity and acceptance of bitcoin from e-commerce. The publicity bitcoin gained in such a short period of time forced central bankers, economists and investment professionals to express their views in the matter. 
While certain individuals like Fred Wilson, Bill Gates and David Woo, are positive for bitcoin’s progress, others (such as Roger Willis, Alan Greenspan) still have doubts for the future of the “currency”.

The Central Bank of China was the first central bank which required banks to decline any transactions with companies having any relation to bitcoin. In addition, Bank of France stated that bitcoin is not “legal money” and stressed that individuals holding bitcoins should be very cautious as if a hacker steals their money they will not be able to take any legal actions.

On the other hand, Bank of America-Merril Lynch initiated coverage on bitcoin giving a target price of $1300.

Supporting and opposing arguments:

The states the following benefits of Bitcoin:

Global accessibility
Control against fraud
Cost efficiency: A Bitcoin transaction can be much cheaper than its alternatives and be completed in a short time.
Crowdfunding: Bitcoin can be used to run Kickstarter-style crowdfunding campaigns
Dispute mediationg: possible for a third party to approve or reject a transaction in case of disagreement between the other parties without having control on their money.
Multi-signature accounts: Multiple signatures allow a transaction to be accepted by the network only if a certain number of a defined group of persons agree to sign the transaction.
Flexible transparency: All Bitcoin transactions are public and transparent and the identity of the people behind the payments is private by default.
High Volatility: According to Wall Street Journal, the annualised volatility of bitcoin was 139% which is 7½ times as volatile as gold and more than eight times as volatile as the S&P 500.
Bid-Ask spread is huge. Today, shows a bid price of £500 and an ask price of £540. This yields to a spread of £40 or 7.5%.
No historical bitcoin’s performance during a crisis. We cannot be sure how the “currency” will react in case of a financial crisis like the 2008 financial crisis.
Fears that bitcoin may be used in “black market” transactions and for money laundering.
Security issues: Incidents of unauthorized mining of bitcoins. Numerous exchanges have been hacked.
No fundamentals behind bitcoin. No intrinsic value. Extremely difficult to estimate its value.
Its price could easily be manipulated even with a small amount of money and there is no authority to control such actions.

Bitcoin cannot be defined as a “currency” and possibly not even an investment as long as its price volatility remains at such high levels. The lack of regulation, control and security concerns also make it difficult for bitcoin to be considered as a “safe” product. The risks associated with bitcoin are obviously numerous and the alternative “currency” called bitcoin will not be clearly safe unless those issues are addressed (which could probably take many months or years).


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