New Warnings About Bitcoin Volatility And Investment Risk

Some say it is the authorities trying to scare the Bitcoin community. Others believe that it is a conspiracy to take over and regulate the Bitcoin system. Or even destroy it altogether. But as France joins the growing number of governments warning about Bitcoin volatility, there is no denying that these types of official warnings will detract some potential new users from buying or transacting in Bitcoin.

Bitcoin is a ‘Bubble’

The stance of some government authorities have even resulted in Bitcoin’s value declining quite suddenly and contributed to caution among consumers. A few days back, Alan Greenspan, the former Federal Reserve Chairman warned that Bitcoin is a ‘bubble’ and that its prices are unsustainably high. This is not surprising as US authorities have been making similar warnings for a while.

And then there was China’s change in stance to Bitcoin that many claim led to its recent decline in value. The events in recent days have also raised concern as to whether Bitcoin will fall below the $500 mark by end 2013. France’s contribution to the government warnings on Thursday is undoubtedly going to contribute further to the cautious approach by some.

Stack of Bitcoins

Bitcoin is Volatile

But why is Bitcoin said to be volatile? There are two major issues here. One being that Bitcoin is not based on anything tangible and not seen as a true currency. Second is the issue about the media hype that has propelled Bitcoin to new heights with it exceeding the $1,000 mark. Other factors like the lack of control by a central authority are also a consideration.

Currency as we know it is a legal tender. It has to be issued by a recognized authority for it to be accepted as currency. Bitcoin is not. Authorities have been trying to define it with some seeing it as a voucher rather than money. Other governments have relented. However, it has not fully acquired currency status yet by the largest economies in the world.

Many currencies are based on something tangible like gold. Some are pegged to other currencies. And others are based on the size of its economy and use for specific commodities. While the tangible issue can be debated, there is no denying that the various factors that determine a currency’s value is to a large extent measurable and can be manipulated  by a single authority. The same cannot be said for Bitcoin.

This has been seen in recent months when the hype propelled Bitcoin to the $1,000 mark. This was almost a 100 fold increase in value within a year. Just a few days of panic has seen it fall to below $700 and there is no central authority that could prevent this. It is these characteristics that make Bitcoin volatile and even risky for the investor.

A Risky Investment

The Bank of France has also cited reasons such as Bitcoin’s potential abuse for money-laundering and even financing of terrorist activities. Without explicitly saying so in recent days, it seems that many governments are set on detracting from the use of Bitcoin especially as investment vehicle.

Bitcoin usage by consumers and payments accepted by Bitcoin is still relatively small. The risk is limited to a very confined group of consumers and businesses. The concern is that if large sectors of any population jump on to the Bitcoin bandwagon, investing their savings and income or locking profits in Bitcoin, the impact can be severe should the Bitcoin fall drastically in value.

Volatile or not, it seems that Bitcoin is unlikely to lose all of its appeal just yet. However, those looking at investing in Bitcoin particularly with money that they cannot afford to lose should take heed of government warnings. Bitcoin’s purpose was to be a digital currency that can be used to transact across borders with very low processing fees. It was not intended to be the investment vehicle it has become.

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