During a client meeting a few days ago we were asked about Bitcoins. One of our clients had received a number of solicitations to buy Bitcoins over the last few months and he asked us for our opinion.
Bitcoins are an invented electronic “currency” that has attracted the attention of the financial press. They are designed to appeal to people who are concerned about the value of more conventional currency. Concerns about a national currency becoming worthless have been one of the main reasons that people have invested in gold, silver or other commodities. These are said to have intrinsic value when paper currencies become worthless. After all, gold and silver coins have been around a lot longer than pieces of paper with pictures of dead presidents.
Today’s transactions using conventional currency – like dollars – have largely been taken over by electronic transactions. Every time you use a credit card, write a check, pay bills via your bank’s on-line bill pay program, you are moving ledger balances, not paper currency. So why not use an alternative, global electronic currency?
In my view, the problem with Bitcoins is not just that their value has gyrated even more widely than gold or silver, but that there is no national authority that stands behind their ultimate value. The headline recently read: “Shutdown of Mt. Gox Rattles Bitcoin Market.”
Once the pre-eminent marketplace for buyers and sellers of bitcoin, Mt. Gox stopped all transactions on Tuesday, and its website disappeared. The site later came back, carrying only a message that said the halt was “for the time being in order to protect the site and our users.”
We recognize that governments have often been guilty of debasing the value of their currencies. However, we are not ready to jump on the Bitcoin bandwagon since they seem to be even more unstable and prone to failure and loss than all but the most irresponsible kleptocracies.
We advised our client to take a pass.
Investment Views 