The Bitcoin Bubble Just Keeps Getting Bigger

Bitcoin once again found itself in the national spotlight. Two weeks ago, the ditigal currency made headlines when a Senate hearing attempted to dissect the mystery and legality of the hugely volatile form of digital currency.

Perhaps surprisingly, the results were pretty favorable -- regulators acknowledged that, while this type of currency could potentially be utilized in dangerous criminal activity, it can also help lower transaction costs and provide an outlet to individuals who are unbanked or underbanked.

As news of the Senate's positive reaction spread, Bitcoin's value skyrocketed. Within an hour, the currency was trading at $700 -- an all-time high -- and has since gone on to reach more than $1,200. The Senate might have been able to see some good in Bitcoin, but good news alone won't be enough to keep this newly inflated bubble from bursting at the drop of a hat.

What was said
Both sides of the Bitcoin were looked at, so to speak, when the issue was discussed in the Senate. Jennifer Calvery, director of the Financial Crime Enforcement Network explained that Silk Road, the Internet's largest narcotic and contraband marketplace, requires customers to pay in Bitcoin because the decentralized currency allows users to remain anonymous. She added, however, that any financial institution faces the risk of being exploited for "money laundering and terrorist financing."

To combat that potential, David Banks, commissioner of banks for the Massachusetts Division of Banks, has said that state agencies have begun "actively monitoring new entrants into the digital market." It may take a while to learn how to effectively regulate what they're monitoring, but these kinds of statements are at least a start to wrangling a seemingly untenable new form of currency.

It's not just for criminals
Bitcoin has been reportedly used for many ignominious activities, but it's also an accepted currency for some well-known public companies. Baidu (NASDAQ: BIDU  ) , aka the "Google of China," has recently begun accepting Bitcoin, and earlier in 2013, IAC Interactive (NASDAQ: IACI  ) joined the bandwagon when its dating site OkCupid announced it was accepting the e-tender for its paying A-list subscribers.

Both companies, however, have trod gingerly into this new frontier of digital money -- OkCupid is currently the only company in IAC's roster of Web companies to utilize the currency, and Baidu is only accepting the tender for transactions related to its Jiasule product, which prevents distributed denial of service attacks and also offers firewalls. Despite that hesitation, these developments suggest Bitcoin may be venturing into the more mainstream corporate corners of the Internet, and for aspiring Bitcoin investors, that could send the currency's worth up even higher.

Size and volatility
Even if Bitcoin can be effectively regulated, there's still a huge question left looming: How much is anonymous, decentralized currency actually worth? As fellow Fool contributor Fani Kelesidou recently explained, just four years ago, investors could purchase Bitcoin for $50. Anyone who managed to get in at the bottom floor could get some ridiculously huge returns, but they would also have to weather some serious price fluctuations that aren't for the faint of heart.

Put simply, Bitcoin is so volatile that one small event could either send it spiraling or skyrocketing. In June 2011, the currency jumped from $1 to $30 in two weeks, shooting back down to $2-$3 soon after. In a little over two years, those bubbles have become bigger and more frequent, and their pops have been faster and far messier. In April, Bitcoin reached $266 and dropped to $55 in the span of just one day, simply because Mt. Gox (the Japan-based exchange for buying and selling Bitcoin) couldn't handle the sheer volume of requests for the currency and had to shut down temporarily.

Bitcoin's sudden publicity hasn't made the currency immune to price drops. Just two days after the less-than-vitriolic Senate hearing, Bitcoin's value had fallen from $748 to $556. While that's by no means within the single-digits range, it's still a 25% drop brought on by seemingly nothing, except perhaps a lack of new developments. If Bitcoin can fall simply because no one's talking as much about it, there's no telling how far it could go on actual bad news -- like, say, a discovery of more criminal activity.

Will it ever be a safe investment?
It's fascinating to follow the dramatic ebbs and flows of this highly volatile and disruptive currency, but at its heart, Bitcoin is pretty much the polar opposite of a Foolish investment. Fools invest in reliable, solid companies with hopes for long-term growth, while anyone buying into Bitcoin will have to constantly (read: frantically) check to make sure they aren't missing out on another huge bubble.

If having your investments spur continuous heartburn sounds appealing, by all means, consider investing in Bitcoin, but you'd probably be better off buying a lottery ticket.

Beyond Bitcoin
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  • Report this Comment On December 04, 2013, at 2:09 AM, mothership wrote:

    Ok so I think we need to walk through this... There are some problems with your story. "As fellow Fool contributor Fani Kelesidou recently explained, just four years ago, investors could purchase Bitcoin for $50. " FALSE Bitcoin traded at $50 earlier this year. 4 years ago bitcoin was just starting.

    "Bitcoin's sudden publicity hasn't made the currency immune to price drops. Just two days after the less-than-vitriolic Senate hearing, Bitcoin's value had fallen from $748 to $556. While that's by no means within the single-digits range, it's still a 25% drop brought on by seemingly nothing, except perhaps a lack of new developments. If Bitcoin can fall simply because no one's talking as much about it, there's no telling how far it could go on actual bad news -- like, say, a discovery of more criminal activity."

    You need to step back and spend some time researching the topic! The price will not fall simply because no one is talking about it. Why? People are not going to stop talking about it. Germany has just announced it is deeming BTC a legal tender. Chinas 3rd largest telecommunications company is accepting Bitcoin as payment. Virgin Galactic is booking trips paid in Bitcoin. The price fluctuation on the Senate hearings rebounded and prices at this moment look like this, $1154.94/ BTC. The daily $ volume of Bitcoin that moves across the exchanges is now greater than Western Union, Discover and Paypal, sitting behind Amex, according to coinometrics. We are talking something very different here, not a traditional investment, you need to look outside the box here and really understand what is at play. Crypto currency is something that has governments around the world scrambling to figure out how and what it is. What they are finding is that the technology behind these coins is what is really on the table. The idea of a public open ledgers, the blockchain, the heart of the BTC network. BTC being a store of value that can be sent at any hour of the day for a fraction of the fees incurred via international wire, credit card etc. The ability to do this changes the whole game. Think about this scenario. USA company has its China based manufacturing partner. Payments go out via wire, hit the exchanges then China bank. Fees are incurred, these wires have to go out during business hours and have a delay of 2-5 days usually. With BTC, the USA company can have payment out anytime of day, near instantly funded to their Chinese partner and the fee is near zero. What bank or service can touch that?

    Warren Buffett didn't make billions by betting on half-baked stocks, or on "lottery ticket" style investments.

    Today is a new day... wake up to technology, FinTec is a term we will hear more about.

    They are not saying it publicly but Western Union, Paypal, Credit Card companies, Banks are all busy trying to figure out how to get on board, because the future of money has shown its face and there is only one way forward.

    The best advice for this market is buy in now! Diversify your portfolio between BTC and LTC and go for long term holds. There is plenty of opportunity for day trading and arbitrage as well. But a safe play is long term, also check out bitcoinwisdom, they have good realtime charts for many markets. If you want to know more follow me on @Buzzdron

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