Without a doubt, the biggest investment story of 2013 was Bitcoin, with a gain in value for the virtual currency of over 10,000% over the year. Its increased utility, first among black market traders on the infamous Silk Road website, and then later among Cypriots looking for a more reliable store of value after the bail-in of the banking system in that country, sent its value through the roof, and for a while it seemed like the price would never stop rising.
It was to be a bumpy ride, however, with the price of one Bitcoin falling from $200 to $60 after cyber attacks affected several high-profile Bitcoin exchanges, and the banking crisis in Cyprus abated. Then, in October, things started to get really crazy. The closure of the Silk Road website that month, after an FBI sting on its proprietor Ross William Ulbricht, brought about the biggest seizure of Bitcoins by a government agency to date, and many predicted that this would be the beginning of the end for the crypto-currency. Yet, the opposite happened, as demand for the currency in China started to soar, creating one of the most unprecedented price bubbles of recent history.
By November, the currency had hit an all-time high of $1,242 on Mt. Gox, one of the original and biggest bitcoin exchanges. To put things in perspective, spot gold prices hit a session low of $1,240 per ounce that same day. Considering that you could buy a Bitcoin for just $12 at the beginning of 2013, that represented quite a leap – an increase of 10,250% to be exact.
As you might have expected, the notoriously non-libertarian Chinese government weren’t too keen on the rapid growth in the use of this alternative currency, and banned banks from handling Bitcoin transactions on December 5th. This caused demand for the currency to cool dramatically, and within a few hours the price fell to around the $500 mark. Although the price subsequently rebounded to a certain extent, two events in the couple of days have cast serious doubts over the future of Bitcoin.
One was the indefinite closure of the aforementioned Mt. Gox exchange due to what has been described as a technical malfunction, meaning that users could no longer make withdrawals from the site. This was the latest in a long line of problems with the site, which included the seizure of Mt. Gox bank accounts worth a total of $5 million by the US authorities after the company failed to register as a money transmitter. The other was the news that Russia had followed China’s lead in banning Bitcoin, partly because of its use by criminals, and partly because its price is determined solely by speculative actions that entails a high risk of loss.
If other countries follow Russia and China in banning Bitcoin, which seems likely, then it will undoubtedly continue to exist, albeit with extremely limited utility, which means its value could plummet even further. Upon the Russian announcement, the currency fell by around 6.5 per cent to $732.40 at 3:09 p.m. EST, according to the CoinDesk Bitcoin Price Index, which averages prices from exchanges including Mt. Gox.
Bitcoin’s main strength for many users is its anonymity, but this may prove to be more of a weakness when it comes to gaining mainstream acceptance. In the US, state regulators are currently mulling over regulation for digital currencies, and while this points to a future where they will be accepted into the mainstream, it may not be feasible for Bitcoin to do so due to its inherently secretive structure. However, efforts at self-regulation by could pave the way for Bitcoins to be accepted as a mainstream currency, and regulated as such.
In an interview with Forbes magazine, Guillaume Babin-Tremblay, executive director of the Bitcoin Embassy in Montreal, said: I think self-regulation is the next step for bitcoins, to make it mainstream,”
“Investors would feel more comfortable investing in bitcoins if there were some rules.
These views were echoed by Saxo Bank Co-Founder and CEO Lars Seier Christensen on beta.tradingfloor.com yesterday, who believes that other, better-regulated digital currencies may prove to be the way forward:
“Bitcoin will face serious challenges in the long run, although I believe such digital currencies could have a place in the economy in more well thought-through structures with values better linked to real assets. There is no doubt that many central banks have made a mess of things with their own fiat money without linkage to reality, and it is entirely conceivable that the private sector could also in the area of currencies do a better job than public sector institutions. It does in pretty much every other area under the sun, so why not here?”
“Anything in the financial space that can be regulated will be regulated. Get used to it! This will also apply to digital currencies. But regulation could be their ticket to real acceptance and success and should therefore not be seen only as a negative.”
“Bitcoin is still a very small part of the economic system and will not pose a serious threat to more established models any time soon. But if it does one day and it overcomes regulatory issues, it will be embraced.”
“Bitcoin is increasingly used by migrant workers to transfer money back home, and is therefore beginning to serve really genuine purposes, not just ideological ones, which is promising to see.”