Following the digital gold rush

Few investors could have missed the explosive growth of bitcoin in 2013, its surge in value making cyber millionaires through astronomical returns and leaving governments around the world scrambling to piece together policies to govern its use. For those who escaped the hype, bitcoin is a decentralised, mathematically-mined crypto-currency created in 2009 for use online – specifically in the legally-murky ‘dark web’. It is now going mainstream, however, with companies such as Richard Branson’s Virgin Galactic accepting the currency as payment for trips into space. Bitcoin is certainly a mouth-watering prospect for investors, but as with many such opportunities it is no stranger to volatility. In January 2012 the average price was $5.48 a coin. By January 2013 it had reached $20.41 and while in the first week of January 2014 alone saw highs of $1,040 and lows of $800 (see chart). For the coin to gain or lose hundreds in value in a day has become commonplace, and while fun to watch as a bystander, the question for investors is, will it crash? In addition to the massive swings in value, many critics are concerned with the deflationary nature of bitcoin. There will only ever be 21m bitcoins, and that has led some to fear that the currency will have a ‘deflationary’ element in the future, leading to each unit getting comparatively more valuable over time. For most money managers, it is far too early to tell how well Bitcoin will do —the currency is so new and so volatile that predicting its future value is pointless. Still, like any gold rush, bolder investors are staking their claim early.