Bitcoin’s Price is All Over the Place
Andrew Osterland | CNBC
It’s been a wild ride for bitcoin investors in the last week.
The news that the CME Group would launch a futures contract on the first and most highly valued cryptocurrency in the market sent the price of each bitcoin flying to a record high of $7,879 last week — more than 10 times its price of just a year ago.
On Wednesday, however, sentiment reversed sharply, as a plan to make the bitcoin network more practical for users fell apart. It was reason enough for scores of hedge funds now trading the digital currency to take some profits. Bitcoin was down 30 percent by Saturday.
“Bitcoin [and other cryptocurrencies] are not for the faint of heart,” said Ian Weinberg, CEO of Family Wealth & Pension Management. “I expect a lot more upside and downside volatility.
“It’s getting on the radar screen of Wall Street now, but this is speculation. I don’t consider it an investable asset class yet,” he added.
The investment story for bitcoin and cryptocurrencies is attractive to more than just techies and libertarians, however. The blockchain technology employed by cryptocurrencies is a major innovation. It offers a secure way to execute transactions worldwide without intermediaries taking their pounds of flesh: no central bank, no clearing firm, no “trusted” third party. It has the potential to lower costs and improve security by cutting out financial middlemen for all sorts of transactions in a wide range of markets.
“It’s an alternative currency with no third-party mediator audited on a daily basis by its own users,” said Samuel Boyd, an advisor with Capital Asset Management Group. “If cryptocurrencies become widely accepted, bitcoin is the gold standard.”
The so-called blockchain underlying cryptocurrencies essentially constructs a public ledger of transactions and replicates it across all the computers in a network, making it virtually impossible for people to reverse transactions or to double-spend currency. Bitcoin owners have a continuously updated record of every transaction in the currency since it was created by the mysterious Satoshi Nakamoto in 2009. Every 10 minutes a new block of transactions is added to the chain and transmitted across the network.
Theoretically, people with enough computing power — such as a coalition of bitcoin miners, who help maintain the integrity of the network and get rewarded with new bitcoins — could manipulate the blockchain, but it would likely not be in their best interest to do so.
“There could be malicious actors, but as bitcoin owners, they would probably hurt themselves more than anyone else,” said Matt Green, a professor of computer science at Johns Hopkins University.
As a medium of exchange, bitcoin has thus far been a flop. While plenty of companies will accept bitcoin as payment for their products and services, few consumers have taken advantage. It takes a lot of computing power and is inconvenient for small-value transactions.
“People don’t use bitcoin to buy a cup of coffee,” said Boyd at Capital Asset Management Group.
As a store of value, however, bitcoin has become a huge hit. The roughly 16.5 million coins in circulation had a market value of significantly more than $100 billion before the recent drop in price, and the launch of a futures contract on bitcoin could expand the investor base beyond the tech-oriented enthusiasts and the hedge funds that love the volatility.