Undoubtedly, bitcoin, which was the brainchild of a bunch of elusive computer developers and created in 2008, has captured the imagination of fearless investors who have been taken in by its rapid price increase year to date.
At the beginning of 2013, bitcoin was priced at just $13 and most were scepital of its survival. On Thursday, however, it shot past the $1,000 mark, with some of its supporters heralding bitcoin as a decent store of value and a hedge against inflation, largely because of bitcoin’s finite supply.
Rival to bullion?
Few assets have seen such a fevered rise in value and bitcoin’s recent surge has drawn the speculators in, prompting some commentators to wonder if bitcoin really is a credible alternative to fiat currencies and a serious financial asset in its own right, perhaps even supplanting gold.
But bitcoin’s critics have spoken out too, and urged that like other digital currencies in the past, bitcoin has some potentially “fatal” weaknesses.
Julian Jessop, who took a look at the currency for Capital Economics, falls into this camp and said that while bitcoin was becoming more widely accepted as a means of payment, there were serious problems linked to it, such as the lack of official involvement in the currency.
He said: “Governments have generally taken a laissez-faire approach and only clamped down on websites that use bitcoin for buying and selling illegal goods and services….the recent price surge was partly driven by comments from US officials to the effect that bitcoin provides a legitimate financial service. However, while individuals and firms can accept bitcoin in payment if they wish, it is not legal tender.”
Value fears
Adding to this concern is the fact it is hard to put a price on bitcoin, even if speculators seem happy to keep pushing it to new highs.
Capital’s head of commodities Jessop pointed out that even though gold has its critics, bullion is a better bet in this regard than bitcoin.
He said: “Gold at least has some intrinsic worth as jewellery and industrial uses, as well as a track record stretching over many millennia.
“Indeed, a similar percentage increase in the price of bitcoin in 2011 was followed by a collapse. Another sharp fall could deter retailers from accepting payment in bitcoin and undermine its appeal as a rival to conventional money transfers.”
“Legitimate”
Elsewhere, there are also concerns that bitcoin’s limited supply could prove a stumbling block if the digital currency were ever to take off among the masses. Currently, new bitcoins are created by computers solving complex algorithms, and this keeps its numbers tight.
