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Unusual assets: Is it time to back Bitcoin?

Annabelle Williams
Written By:
Annabelle Williams
Posted:
Updated:
12/12/2013

Bitcoins have been causing a stir in the investment world after soaring to record prices this year.

Bitcoin

Bitcoin is a ‘virtual’ currency created in 2008 by an anonymous web developer to allow internet users to purchase goods and services online – without relying on a central bank or credit card system.

Although the concept remains niche, Bitcoins have grown in popularity and are accepted by mainstream internet giants including blogging site WordPress and dating site OkCupid. Until China’s central bank banned financial institutions from handling Bitcoin earlier this week, the currency was accepted by the Chinese equivalent to Google, Baidu.

Bitcoin was created from a complex mathematical formula that controls the amount in circulation. No more than 21m Bitcoins will ever be in circulation – a figure expected to be reached in 2140.

Spreadbetters have flocked to Bitcoin with market leaders like IG Index offering a trading service to clients.

Speculators have been blamed for making the currency notoriously volatile in recent years, and the price swung from $15 per BTC in January 2013 to $700 per coin in November, leading the currency to be dubbed ‘digital gold’ by some investors.

The investment community has also begun taking a more significant interest, with analysts at Bank of America Merrill Lynch saying Bitcoin could reach $1,300 per coin if it continues to gain traction as a money transfer conduit and store of value.

Capital Economics is more cautious, however, saying the digital currency has some “potentially fatal” weaknesses, including its lack of official backing (the very thing that has attracted so many buyers), and its finite supply.

“[The finite supply problem] could be solved by changing the algorithm that determines the stock or by a surge in issuance of other digital currencies, but either could undermine Bitcoin’s price,” said Julian Jessop, the forecaster’s head of commodities research.

Nevertheless, a Bitcoin investment fund is now in the pipeline, the brainchild of the Winkelvoss brothers who were made famous through their claim to have invented Facebook and later won an estimated $65m in compensation from the site’s founder Mark Zuckerberg.

The brothers expect the total market cap of Bitcoins will reach $400bn and have spent £11m of their own capital buying up the coins. Their proposed Winklevoss Bitcoin trust will sell an initial $20m worth of shares to investors and operate as an exchange traded fund that holds Bitcoins.

This followings the launch of a Bitcoin trust in September – the SecondMarket Bitcoin investment trust. This trust is modelled on the popular SPDR Gold ETF, and aims to offer a weighted price which reflects a more accurate market view.

Although the currency has been criticised as a vehicle to facilitate money laundering and illegal activities, the Winkelvoss brothers point out that US dollars have been used by criminals for generations.

The US Department for Justice recently waded in to the debate, saying it sees a future for virtual currencies as a legitimate facilitator of commerce. Moreover, a computer’s IP address is logged in a public database every time a Bitcoin transaction takes place, in theory making currency transfers traceable.