Bitcoin is a digital currency that has been grabbing a lot of media attention recently. Its value has soared since its introduction in 2009 and it's now accepted as a trading currency by various merchants and individuals worldwide. If you were an early investor and decided to invest $100 in bitcoin in October 2009 and then sold out at the current all-time high set earlier this month, your profit would have been over $34 million (£22.3 million). But is bitcoin a fad destined to fall by the wayside, or is it a concept that could change the world of currencies as we know it?
Many analysts are sceptical, saying that bitcoin is just a concept and can't be effectively valued, so investing in the currency isn't worth the risk. We find this argument illogical and dangerously short-sighted. And bitcoin trading volumes have increased significantly recently, with on average more than 50,000 bitcoins changing hands per day. Why? There are several positive aspects to bitcoin.
First, the currency is unaffected by monetary policy. Recent aggressive money printing by the likes of the US and Japan has created extreme exchange rate volatility. Bitcoin's value, however, cannot be influenced by governments, a trait that may become even more attractive to investors as times goes on. Furthermore when, for example, they look to Cyprus, where the EU recently confiscated millions in euros of cash from national banks, the idea of a virtual currency like bitcoin may well become particularly appealing, as using one means you don't have to worry about banks you've deposited your money in becoming bankrupt.
In addition, the fact that the currency is almost completely anonymous means it'll attract increasing attention from those involved in illegal activities. This is not necessarily negative for the currency's value or usability - just look at the US dollar, in which most illegal trade is currently done. Also, the fact that there's currently no bitcoin regulation means the currency will also always be attractive to anti-establishment groups.
However, bitcoin may not be forever. The currency has one major potential fundamental flaw as a trading medium: the amount of bitcoins is set to be capped at 21 million by the year 2140, which in theory will make it more profitable to hold bitcoins instead of spending them, assuming that demand for them holds up. Another threat to bitcoin is concern around its security - if you lose your virtual "wallet", there are very few safety mechanisms that can help you get it back, which will be a disincentive for many people to using it.
But, in conclusion, we believe that bitcoin has opened up a whole new world for currencies and we predict that in ten years time there will be many more virtual currencies, trading alongside each other and traditional currencies, and seeing their price movements adhere to the power of the markets. But lawmakers are perhaps the most significant threat to the currency's existence as they may feel threatened by the increasingly prominent presence of something they cannot easily monitor or control. So bitcoin's very success could well end up being its biggest weakness.
This summer, Amplify Trading will be running its Investment Banking Preparation Course, a programme for any students who want to take their first steps in, or deepen their existing knowledge of, trading in the finance industry with a view to securing a graduate role here. The course will run from 17-21 June at a Canary Wharf location and costs £779.00 for five days. For more information, visit ibprep.co.uk