View from the trading floor.
Chris Tripp works on IG's trading floor in London. IG is a leading financial spread betting provider.
Bitcoin is a peer-to-peer payment system and a virtual currency that can be 'mined' by users and exchanged for selected goods or services. Since making its way into the limelight, the value of a Bitcoin has experienced exceptional volatility. In November 2013, Bitcoin climbed to over $1000 on the trading exchange Mt. Gox.
The idea of such growth makes it seem like an interesting prospect for investors. The biggest question investors face is whether Bitcoin is a sustainable investment or whether this growth is being fuelled purely as a result of media hype and expectation.
The rates of traditional currencies are determined by the perceived state of a country's economy, prospects for economic growth and the effects of its central bank's monetary policies.
Bitcoin has no central bank or exchange, the value is determined by demand and computers straining to solve complex algorithms to 'mine' the limited number of coins.
The value of Bitcoin tumbled after it was discovered that a website distributing drugs was accepting Bitcoins as payment for illegal products. Due to a lack of regulation, events of this nature have seriously damaged Bitcoin's credibility as an internationally recognised currency.
Towards mid-December Bitcoins tumbled 25% in reaction to China announcing that they were to restrict domestic exchanges from accepting new inflows of cash. China's facilitation of commerce made it one of Bitcoin's strongest growth markets, however, the fact that Bitcoins could be used to dodge the country's capital controls meant that regulators took pre-emptive action.
It's not all doom and gloom for Bitcoin, Hong Kong is poised to take delivery of the second ever Bitcoin ATM, after Canada installed the first in October 2013. The machines allow users to buy and sell Bitcoins in just a few clicks. This is solid evidence that Bitcoin is being taken seriously and is taking steps to become a legitimate currency and method of payment.
More retailers and service providers seem to be accepting Bitcoins as a payment method. Overstock plans to become the first big US retailer to accept Bitcoins, though this is thought to be due to CEO Patrick Byrne's own political views. In contrast, Bitcoin has been banned by some large retailers such as Alibaba, the Chinese equivalent of Amazon.
The success of Bitcoin has been such that other virtual currencies seem to be emerging. The most recent example has been dubbed 'Coinye West' after the rapper Kanye West, and is following the path of other cryptocurrencies such as Litecoin, Peercoin and Dogecoin. Although these other virtual currencies have not experienced the same success, it does suggest that Bitcoins are already starting to face increased competition in the virtual currency market.
The future of Bitcoin is difficult to predict; however its success is firmly dependent on its ability to establish itself within developed economies, emerging markets and multinational retailers. This is potentially challenging for Bitcoin with its lack of regulation and negative perceptions making it more risky than traditional currencies. As a prospective investment the recent returns seem to be too good to be true, however its sensitivity and susceptibility to news means that it must be treated with caution.
Keep-up-to-date with what's happening on the financial markets: http://www.ig.com/uk/ig-economic-calendar
Spread bets and CFDs are leveraged products. Spread betting and CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.
This information has been prepared by IG, a trading name of IG Markets Limited. The material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.