How long can bitcoin’s spectacular rise continue?

We’ve all made mistakes. And there is nothing like the world of trading and investing, with its endless supply of numbers as hard evidence, to remind you of them on a daily basis.

It makes it all the more difficult to put your errors behind you.

I’m looking at one such number now: $390. How that hurts. Why? Because that’s the current price of bitcoin…

The one big speculative story of the last few years – bitcoin

Forget prime central London property or the US stock market. Forget the prospector who struck gold or oil. Forget the entrepreneur who brought you this widget or that website. The game to have been playing these last few years is bitcoin.

Back in 2009 I was approached by a number of people about it. From presenting a legitimate challenge to existing monetary models, to freeing up trade and exchange, it did everything a form of money should and more.

“Yeah,” I said. “It’s a crypto… what? Digital… right, ok.” The sales pitch wasn’t hooking me. As soon as I heard it had doubled and more, I lost interest. I don’t like chasing things that have doubled, particularly if I am not sure I understand them.

I switched my focus back to gold. I’m a bloke. I can only concentrate on one thing at a time.

More fool me. What I was shunning at a dollar because it had doubled, is now trading at $390! Me, Mr Monetary Reform, missed the wretched bitcoin boat.

There’s the story of Kristopher Koch, the Norwegian student who bought 5,000 bitcoins for $27 in 2009 as part of his thesis. He forgot all about them, and only found them last month. Now he’s rich: 5,000 times $390 is $1,950,000!

I could have invested five hundred quid and ended up with enough to buy a house in Chelsea, a holiday home in Cornwall, funded my dad’s West End musical, my own zombie film, and had enough left over to start a foundation to rehabilitate bankrupt junior mining companies.

Oh, well. Time to get over what might have been and look forward. Should we be buying bitcoin now?

In spite of everything, I’m still not a big buyer of bitcoin

Barely a month ago I wrote about bitcoin. I admired its brilliance, but I also recommended caution. It was $130 or $140 then, or just above. It’s pretty much tripled since. Wrong again.

But I’m not changing my mind now.

People get very passionate about their investments. And when the investment has a political overtone to it – which alternative forms of money such as gold and bitcoin certainly do – that passion goes into overdrive. Pass a negative opinion about gold or bitcoin and you risk the wrath of their owners.

Still, I have to say, for all its qualities, I think there is too much speculative excess in bitcoin at the moment. People find it hard enough to value gold – but how do you value bitcoin? It’s got a limited supply in its favour (there are about 12 million so far, and an upper limit of 21 million). But could someone find a way of replicating them? I’m told not, but who knows?

And there are plenty of other risks. Quite apart from the recent closure of online black market Silk Road, bitcoin heists are a fairly regular occurrence. Tech website Pando Daily notes that a bitcoin exchange in China shut down last month, taking about $4.1m in users’ money with it.

I’m not saying it is, but it could turn out to be a huge bubble, a Ponzi scheme even. If it does all unravel, it will look obvious after the event.

The bigger problems facing bitcoin

But assuming bitcoin is here to stay, there are two bigger issues. The first is that bitcoin is meant to be a medium of exchange. That’s what it’s so useful for.

Trouble is, I hang on to the few bitcoins I have. They’re rising in value so fast, I’d rather spend my pounds or dollars. I’ve also made it possible to buy my book with bitcoins – in fact, I’d rather receive bitcoins than pounds.

This is a form of Gresham’s Law at work: bad money driving out the good. In Sir Thomas Gresham’s time (the 16th century), this referred to people’s tendency to hoard currency with a higher precious metal content, and spend ‘bad’ money instead.

Clearly, this is one of the issues with being an independent currency in a world where central banks are hell-bent on devaluing their own paper. I don’t think it’s entirely coincidence that bitcoin’s recent surge in value coincides with the European Central Bank cutting a key interest rate from 0.5% to 0.25%. There’s also the recent International Monetary Fund report which suggested it would be a good idea to impose a one-off wealth tax to recapitalise debt-ridden nations. Perhaps that has driven some bitcoin buying too, as Europeans seek to hide wealth.

But if bitcoin is to become useful as a more mainstream medium of exchange – rather than one that is preserved for transactions of a shifty nature – its value has to at least stabilise, if not fall. So that argues against its stellar rise continuing forever.

The second concern is that people are starting to take bitcoin seriously. One of the senior economists at the Chicago branch of the US Federal Reserve Bank has even written a research report on them. And it’s not dismissive either – in fact, it shows a very good understanding of the currency and its potential.

This is all very good. But as I mentioned before, the more seriously bitcoin gets taken, the more that governments will come after it. They may not be able to crush the crypto-currency concept now that it’s out there. But they may well be able to tame it with regulation. When push comes to shove, there’s no way that governments are going to cede control over one of the key things that gives them their legitimacy and power – the monopoly over currency issuance.

All in all, I’m sticking with my call of last month. Own some bitcoins. Accumulate more if you can, but only with speculative funds you can afford to lose. I suspect a rollercoaster ride lies ahead.

It’s actually quite easy to buy bitcoins, though it looks quite daunting at first. In most cases you open an account, deposit some money and you’re off. The world’s largest exchange is Mt Gox. Blockchain lays it out conveniently for UK users.

Bitbargain also has an online tutorial. It takes a bit of getting used to – start with very small amounts while you get to grips with the process – but it’s actually wonderfully simple.

• Dominic Frisby’s first book, Life After The State, is now available to buy at Amazon or Unbound

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  • Tom

    “How long can Bitcoin’s spectacular rise continue?”

    Until we hit the maximum 7 transactions per second limit.

  • Cleverwithmoney

    My advice to Mr Koch would be to get rid – asap. To say that the rise in value is unsustainable would be an understatement of epic proportions. I agree that it will not be long before governments interfere.

    It’s a great example of how people fall in love nowadays with an undeniably good idea but leave their wits behind when deciding how much they’re prepared to pay for it!

  • HiarLoss

    I would imagine that the demand for bitcoins will generate copy-cat currencies. The first will be successful, the second not quite so succesful, the third a little less, etc. until the market is awash with digital currencies and their unique value of limited numbers is gone and it becomes just another fiat currency. What do you need to set up a digital currency – some maths and a website?

  • Pete

    One comment:
    Mr Koch invested $135,000 (5000 X $27) so it is somewhat misleading to portray him as a meager student. Sure he made some money, but if he had that kind of money to speculate with then I would guess he was already a millionaire.

    • Don Mac

      Hi Pete,

      From what I’ve read he bought 5,000 bitcoins for $27 period not each. Good for him turning $27 into $700,000 (as per the comment by sutski), wish it was me.

  • sutski

    “And there are plenty of other risks. Quite apart from the recent closure of online black market Silk Road”

    How is silkroad closure a risk to bitcoin? Thats like saying blockbuster going down is a risk to the dollar?

    If anything, it is a positive point, as people can’t use the tired “bitcoin is only used by druggies” line so easily anymore.

    I have sold and used bitcoin without using it for anything illegal. I use it like cash, so it is great for personal payment of debts to friends too! (using the blockchain app).

    P.S the Norwegian kid sold out at around $140 and so “only” got $700,000


  • sutski

    P.S I read an article on ZH yesterday that put fair value of bitcoin if related to gold at $1,000,000 a piece.

  • j4bberw0ck

    There is a problem with Bitcoin; or at least, in getting your money out.

    I bought 13 Bitcoin for £45 a while ago. I was fascinated by the concept and wanted to “have a play”. I sold them earlier this year for around £1000. With hindsight, of course, I would like to have held them, but never mind.

    I’ve been waiting since the end of June for Mt Gox to send me euro for the coins I sold. They can’t do outbound sterling transfers, which is the same as the domestic exchange, Intersango. I imagine that somewhere behind the scenes there’s a Government anti-money-laundering or tax avoidance war going on (it was certainly money-laundering issues which closed off Intersango). Or maybe Government is just determined to hobble virtual currencies generally.

    So, after 4 and a half months, and many emails to the support desk, I’m waiting for euros to arrive in the nominated account, and I’ll have to pay the bank’s fee for exchanging to sterling. I’m more or less resigned to never seeing these funds (which if it comes to it is irritating, but not the end of the world) because I expect at some stage to see concerted Government action internationally to remove the threat (to them) of Bitcoin.

    Invest in Bitcoin, certainly. I wish it well. But don’t expect to get your money out easily.

  • lskdfsdkljf

    Hey, nice article.. I really like how you were able to admit you were wrong and you are also cautious enough not to go all in but invest moderately. Despite missing the Bitcion boom (I missed the 2009 when I heard about it too due to my lack of understanding at the time and dismissiveness on the subject, but I got it back when it was $100 so I still made out pretty good), it’s nice to see you were able to man up and not make a bunch of excuses like so many other editors/journalists do daily.

    Great read..

  • tKiani

    Good article, however the fact that bad money is driving out good money like that cleans points to the strength and that the weakness it cleaned. The same can be said about Gold,

  • Colin Selig-Smith

    We are at the media attention/enthusiasm stage of the Bitcoin Bubble.

    It’s fascinating to watch this process happen again and again in different markets. Given the progress I expect that sometime mid to late next year, people will be claiming Bitcoin will replace national currencies. Remember to SELL when you see that.

    I’ve had a look at Bitcoin, it is interesting in an academic sort of a way, but there are some fundamental problems with it. Not least being the maths of the blockchain.

  • deandre

    I never did understand this! But remember what happened to the tulips of Amsterdam? It is those ….. who are still buying that are going to get get their fingers burnt.
    I can’t believe that people depart with their money on some digital idea.