The world’s first virtual currency Bitcoin has had its ups and downs while trying to find its place amongst mainstream exchange-traded financial instruments.
Although the Bitcoin market has always been turbulent, the recent decline in its value against real currencies reflects the negative market sentiment. The USD price of Bitcoin reached an all-time high of $230 in April earlier this year, up from $13 at the beginning of the year. However now it’s trading at around $95. These large fluctuations in the value of bitcoin have led to skepticism on its wider acceptance.
Since it first was introduced back in 2008, there has been a multitude of different factors that have discouraged the wider acceptance of the currency. Some of the more prominent reasons include:
- The meager volume traded compared to other currencies and exchange traded funds;
- Its non-regulated character makes it a non-reliable bet;
- The lack of authorized participants for trading Bitcoin derivatives;
- The complexity of virtual currency scares away retail investors; and
- The very high level of volatility in Bitcoin prices.
Despite of all these limitations, Bitcoin has created its own niche market. Infact it offers its users a slew of advantages over conventional currency system. The anonymity of the users provided over a secure open architecture network attracts a lot of people to trade. Despite its volatility, is often traded by web-based businesses such as wikileaks or internet archives. It has also been controversially linked to the black market Silk Road website and to different groups trying to evade foreign currency sanctions.
A recent proposal from the Winklevoss twins to launch an ETF that tracks the volatile Bitcoin has been met with some skepticism from the industry. The harshest resistance comes from the Authorized Participants (Aps). APs typically look for any arbitrage opportunity from a small price difference between the ETF’s Net Asset Value and underlying securities being tracked. That may prove difficult to do when it comes to Bitcoin.
I think the virtual currency will continue to serve its niche market despite all the skepticism and volatility in its value. Furthermore, the survival of ETFs based on Bitcoin will bring it to the mainstream market.
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