What is money? It’s a simple question really, but when we really dig deeper, things become a little cloudier. Put simply, money is a medium of exchange for goods or services. We give a mechanic some green pieces of paper-or the electronic form through our card-and he or she fixes our car. We all want more of it and we hate to lose it, but what is it really?
In this country, we call our money, dollars. Elsewhere, it has different names like Ringgit, Rupee and Loonie. Thousands of years ago, it was gold and silver. Before that, it was barter or stones or even seashells. Most recently, a new form of “money” has popped up. It is called Bitcoin.
Unlike the currencies that we are used to, Bitcoin isn’t backed by any government. It isn’t minted, and people don’t carry them around in their wallet, yet many people have been successfully using it as money. It is a purely digital currency. Recent media reports had a person buying a new car-a Tesla that costs in the neighborhood of $100,000-with Bitcoins.
Bitcoin is no normal currency, however. While all currencies have some price volatility, Bitcoin’s has been extreme. In the last 30 days (11/7-12/8) Bitcoin went from about $300 to $1,200 then down to about $800. It recently traded just above $900 per single Bitcoin. It may be money to some, but its price volatility has been more like that of a biotech stock.
Not everyone accepts Bitcoin. You can’t just walk into any bank and exchange dollars for Bitcoins, nor can you go to the corner ATM and withdraw Bitcoins. China’s Central Bank does not transact in them, nor do many companies. We don’t accept Bitcoins for the purchase of investments. Who knows? Maybe one day, but I wouldn’t count on it. We also don’t take any of the currencies above. We prefer dollars.
I know that someone reading this is thinking, “Should I buy some Bitcoins as an investment? They’ve gone up a lot!” For most people, we would firmly suggest that the answer is “No.” It is speculative and volatile. I don’t want my mortgage payment-which must be paid in dollars-put at risk due to the volatility of a Bitcoin.
Maybe Bitcoin will be as legitimate as dollars or Euros some day, but today is not that day. There is a lot of risk. Aside from volatility, consider how governments are likely to view Bitcoin, especially if it becomes too popular. It’s not out of the question that our government, like China’s, could shut it down or make it illegal. After all, its value is set by a market, and governments can control markets. At this point, however, its value-like most values-is in the eye of the beholder.
Bitcoin Meets Tesla with Lamborghini Dealership’s Model S Sale. Trudell, Craig. Bloomberg. 12/06/2013.
Edited remarks of Kane S. Cotton, Bellatore – CFA, VP & Chief Investment Strategist