Bitcoin as a non-legitimate investment vehicle

Excerpted from Kurt Eichenwald:

“Bitcoins are not an investment. They are an investment fad that someday could be a real digital currency, but if they continue to behave as they have, they will instead be nothing. This is not hard to understand. The fact is that real investments—outside of manias—do not quadruple or sextuple, much less gain 20 times their value so quickly.
Add to that the reality that Bitcoins have no true method of underlying valuation. You want to buy a stock? Pull up its filings with the S.E.C. and assess its financial structure and business strategy. A municipal bond? Same thing. A national currency? Assess the present economic conditions of the issuing country and check relative interest rates, etc., to determine which currency is the most valuable at that time.

Assess Bitcoins? All you can do is examine the trading patterns, which do not provide a real analysis of any underlying economic value. The economics of investments are not solely based on supply and demand, and that is all that goes into Bitcoin prices. It doesn’t matter if the demand comes from a currency panic in Spain—which is one of the rationales being offered for the jump—or rank speculation. There is nothing backing up the values—not a government, not an underlying financial value, nothing.

Then throw one more bit of news on the pile. Mt. Gox, the major Bitcoin trading platform, today announced it was halting trading because of what it called a panic. Halting trading? I don’t recall Mt. Gox halting trading when the stock was zooming up at irrational speed. I don’t recall it declaring that ridiculous growth as a mania, although it’s fine calling the collapse a panic. If trading in a financial instrument can be shut down without notice on a decline—but is kept open when it is going up—that instrument is being subjected to a rules-based manipulation. And given the amount of hoarding involved in Bitcoins—78 percent of the market is being hoarded, according to an academic study published last month—the probability of a pure manipulation of the price by big holders after everyone “cools off” is too high for comfort. (By the way—news for the big holders: if anyone does try to manipulate Bitcoin prices when trading begins, they will probably go to jail. It might not classify as securities fraud—after all, Bitcoins are not a security—but it certainly would be wire fraud.)

Here’s the bottom line. Bitcoins are not a real investment; they are bets inside a casino. If the price goes back up, don’t be fooled. In the parlance of popping investment bubbles, it’s something called a “dead-cat bounce.” People who are desperate to keep the game going rush back in, hoping to bring the price back up, but it never lasts.
As I said, maybe someday Bitcoins will be a real currency. But if you think they are a great investment worth a huge chunk of your savings, check Google maps for your nearest bankruptcy court. You’ll be there soon.”

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