Bitcoin values were gyrating in a wide range between roughly $500 and $900 on Tuesday amid elevated trading volume and ongoing debate over the controversial virtual currency’s future as an accepted medium of exchange.
Bitcoin volatility picked up one day after a Senate hearing on virtual currencies and the U.S. Department of Justice said the digital currency is a legal means of exchange. Bitcoin prices have soared from $13.55 at the start of the year.
Yet technology-sector investor and Crabtree Asset Management founder Barry Randall thinks the volatility surge in bitcoin is undermining its potential as an alternative currency.
“Money by definition has three attributes. It is a store of value, a medium of exchange and a unit of measure. Bitcoin is actually quite sound as a store of value because the underlying encryption scheme has yet to be cracked,” said Randall, who manages the Crabtree Technology portfolio on the Covestor platform. “But wild swings up and down render it useless as a medium of exchange. You can’t have a functional currency that increases or decreases in value, relative to other currencies, by 20% or more in a week.”
For example, bitcoin values jumped to $900 on Mt.Gox on Monday afternoon, up more than 70% from Sunday’s close to a fresh all-time high. The price then proceeded to drop to $650 in 30 minutes, according to GeekWire. These price fluctuations disincentivize merchants to do business in bitcoin because of the uncertainty, Randall says.
Another big issue is taxation, he added.
“Currency and securities regulators might look the other way on bitcoin-denominated transactions, but taxing authorities are unlikely to do so,” Randall said. “State taxing authorities are already upset enough about not being able to collect sales tax on consumer Internet transactions. The idea that they’d allow untraceable bitcoin-denominated sales of everyday goods is unfathomable.”
He does think bitcoin could be most useful in developing economies where runaway inflation is more likely and foreign exchange is prohibitively expensive, if it is available at all.
“The bottom line is that there is a place for a virtual currency like bitcoin that can be transmitted electronically, is cross-border – like the euro – and can’t be debased like a traditional fiat currency. But technical limitations could prevent bitcoin from being that currency. Bitcoin’s current rise is impressive, but it’s actually the strongest piece of evidence that it could never serve as a functional currency.”
Chart source: Bitcoin Charts
Photo Credit: antanacoins
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