Wall Street Doesn't View Bitcoin As Currency
While a Texas Senate candidate is accepting Bitcoin campaign donations, and Overstock.com customers can use the technology to buy engagement rings, Wall Street sees its future more as a payment system than a currency.
Either way, it's been a profitable investment. Created in 2008, Bitcoin's value took off last year, leaping about 60-fold in the past 12 months to $936.51 last week, with prices ranging from $16 to more than $1,200, according to bitcoincharts.com. Gold plunged 26 percent in the same period, while the second best-performing major currency, the 18-nation euro, climbed 7.3 percent versus a basket of its major peers.
While its supporters have embraced Bitcoin as an alternative to currencies vulnerable to sovereign debasement, China's central bank has banned lenders from handling the virtual money and Finland's authorities said it lacks the characteristics of a real currency. Citigroup Inc., the second-largest foreign-exchange trader, said Bitcoin could benefit society if it eases transactions, even though about 1 percent of owners hold some 80 percent of the digital money.
"Bitcoin, in essence, is just an evolution of a payment system," Sebastien Galy, a New York-based senior foreign-exchange strategist at Societe Generale SA, said by phone Jan. 14. "The ultimate concept of transaction, the innovation, is certainly progress in the means of transaction."
Is Bitcoin Real Money?
Bitcoin was introduced by Satoshi Nakamoto, which may be a pseudonym for one or more programmers. The anonymous network is protected by cryptographic codes and works outside the banking system, allowing users to transact with one another directly. It doesn't exist in physical form and has no coins or bills.
"The original Bitcoin was designed to operate outside the financial system," Steven Englander, the head of currency trading for major industrialized nations at Citigroup in New York, said by e-mail Jan. 13. "There is nothing to stop existing payments processors from adopting generic Bitcoin payments technology."
Bitcoin's market value has expanded to about $10.6 billion. The supply will be capped at 21 million, with about half of that already in circulation, according to Bitcoin.org, a repository for information on the system. The price of an individual Bitcoin jumped from $100 in July, to $200 in October and more than $1,000 this month.
For Offit Capital Advisors LLC, this volatility could be its fatal flaw.
"Saying that a currency is a store of value implies that it is a relatively stable value," the New York-based private wealth-management firm wrote last month in a report. "Without that stability, the costs of normal commerce far outstrip any credit-card or bank transaction fees. Bitcoin fails miserably on this important measure."
Bitcoin is less a currency than a virtual commodity, Sheng Songcheng, the head of the People's Bank of China's statistics department, told reporters at a briefing this week in Beijing. The Bank of Finland said on its website that the virtual money doesn't fulfill official definitions of a currency.