Bitcoin is bouncing around like a pinball, skyrocketing to a high of $34,551 Sunday before diving Monday morning to $28,723–a 17% drop.
Bitcoin has since rebounded to trade at $31,693, up 4.76%. The volatility is nothing new for the asset. Its price has more than quadrupled over the past year, but plunged 52% from Feb. 13 to March 11 last year.
At this point, bitcoin has basically become a vehicle for speculation. Many call it a “digital currency” but it doesn’t meet the basic definition of a currency: a medium of exchange. Bitcoin is barely used in legitimate commerce.
Bitcoin bulls say it’s a store of value. But it’s only a store of value because investors/speculators believe it’s a store of value. Some have called it a hedge against inflation and declines in other assets such as stocks, bonds and the dollar.
But bitcoin fell more than stocks earlier last year and is now rising in tandem with stocks. That hardly meets the characteristics of a hedge. Bitcoin did diverge from the dollar most of last year, ascending while the dollar descended. But eight months doesn’t exactly count as a long-term trend.
Meanwhile, inflation has been quiescent since bitcoin was created in 2009, so there has been no test as to whether it’s really an inflation hedge.
A lot of big names have jumped on the bitcoin wagon, including investment luminaries Bill Miller, Paul Tudor Jones and Stanley Druckenmiller. Their enthusiasm could easily be proven right in the years ahead, but also could easily be wrong. Perhaps you don’t want to bet the farm on a positive outcome.
