Cheque, savings, credit… or Bitcoin?

Digital currency is in its infancy and early versions presently pose little threat to those behemoths of online transaction, Visa and MasterCard. While not a ride for the faint hearted, Patrick Noble argues that the Bitcoin siren may be hard to resist.

If, like me, you’re late to the party, Bitcoin is a virtual currency that has been in circulation since the first 50 coins were “mined” from the internet back in 2009. That number has grown to around 11 million today. However, the pace of issue does halve every four years so the mineable supply of Bitcoins will be exhausted at 21 million sometime around 2140.

Bitcoins cannot be considered cash as they are not backed by any government or commodity however, users of the virtual currency do consider it an alternative form of payment, whereby they can exchange tokens for goods and services online, bypassing the need for a financial institution.

Downtown cachet

While the history of the Bitcoin is short, it is nevertheless colourful. For starters, it has the dubious distinction as a favoured exchange among hackers and black market participants. Though if recent reports are to be believed, its acceptance in the broader economy, while small, is growing. And because the value is determined by peer-to-peer transactions, there have been periods where its worth has undergone extreme bouts of volatility.

This was most apparent when Bitcoin values skyrocketed during the Cypriot banking crisis. At the start of March, a Bitcoin could be bought on an “exchange” for around US$33. The rate then exploded, peaking at US$240 on April 9, before plummeting back to US$86 just three days later.

Ponzi scheme or value store?

Certainly not a ride for the faint hearted. Yet for supporters, this is but a blip in the digital currency’s long-term goal of adaption and stability. For the detractors, it’s more akin to a Ponzi scheme that would make even Bernie Madoff blush.

In the latest chapter of intrigue, the Winklevoss twins (of Facebook/The Social Network movie fame and rumoured owners of 1 per cent of all Bitcoins) recently filed the Winklevoss Bitcoin Trust with the US Securities and Exchange Commission. The trust is aiming to raise US$20 million from investors with the objective of tracking the weighted average price of Bitcoins.

The timing coincides nicely with the online currency’s newfound hype, though any type of exposure looks a speculative coin toss to me. Indeed, a more conservative approach, where the asymmetry is in your favour, is preferable.

Up against the big boys

This is where dominant transaction and processing providers such as Visa and MasterCard fit the bill.

Not only are vendors assured of a vastly more stable unit of currency, the size of their global networks dwarf that of the virtual currency. Visa alone had US$6.5 trillion transacted on its payments network over the 12 months to March 2013, earning revenues in excess of US$11 billion.

Time will tell if Bitcoin can gain worldwide acceptance. Technology can certainly facilitate the transaction, but the value will always be highly questionable. For now it looks like a plaything for speculators, whereas the technology platforms of Visa and MasterCard remain the network of choice between merchants and customers, in turn offering highly attractive growth for investors.

The Bitcoin siren call may be hard to resist with the allure of ever-rising value. However, much like your ever-rising rewards balance, it still doesn’t get you much.

Patrick Noble is a senior investment strategist at Zurich Investments