After all, it’s likely that clients will inquire about Bitcoins opportunities for speculative investing because the topic has been garnering more than its fair share of media attention recently. Bitcoins are part of a peer-to-peer payment system that is an alternative to making payments with credit cards or other services.
Businesses that accept payments via credit cards typically pay a fee for the service. Bitcoins are appealing because they charge no fees. They are also free of regulation, are easy to use, and are accepted internationally.
At first blush, the virtual payment system appears to be receiving endorsements from a wide variety of entities. In addition to being embraced by many businesses, the Federal Election Commission recently approved making campaign donations with the virtual currency. Bitcoins can be purchased with cash, which accommodates new users of the virtual payment network, but it also allows investors to speculate on the value of the currency.
On one hand, that can be appealing as it can provide a new asset class for diversifying portfolios. In addition, speculative investments, while being risky, may potentially provide explosive returns.
Meanwhile, a new publicly traded fund that will trade on the Nasdaq will invest in Bitcoins. It is being launched by the Winklevoss brothers and will be called the Winklevoss Bitcoin Trust. The two brothers have also launched the Winkdex which tracks the price of Bitcoins.
Yet, many advisors that have evaluated Bitcoins feel that investing in the form of virtual security isn’t ready for prime time. Speculative investments, of course, are highly risky, so purchasing Bitcoins may not be appropriate for all investors.
Indeed, when Bitcoins were first launched, they were worth 1 cent. They recently traded at approximately $443, which is substantially less than $1,000 that they traded at previously. But other issues exist. For example, Bitcoins are fairly new, so they lack a long-term track record that would be helpful for assessing risk and return characteristics.
As with any new endeavor, things can, and have, gone wrong with Bitcoins. For example, Tokyo-based Bitcoins exchange Mt. Gox filed for bankruptcy after hackers made off with approximately 850,000 Bitcoins, having an estimated value in excess of $400 million.
The exchange subsequently found 200,000 of the missing Bitcoins and investors have settled a proposed class action lawsuit over the matter with a complex plan that involves selling the exchange and also giving former users of the platform an ownership stake. Risks associated with Bitcoins haven’t gone unnoticed by regulators.
Just recently, the Securities and Exchange Commission issued a warning to investors on the virtual currency. In the warning, the regulator emphasized that Bitcoins do not have an established track record of credibility and trust. Since there are no banks involved in Bitcoins and no central regulator, the SEC may have a difficult time investigating Bitcoin related cases, according to the warning. The Commission also notes that Bitcoin exchange rates have experienced volatility.