Economists advise would-be Bitcoin investors to put their money in peripheral services instead of holding on to the crypto-currency itself, which could be problematic due to volatility.

tax bitcoins 1280x960 1024x768 Invest in Bitcoin services, not Bitcoin itself, says economist

Bitcoin is on the rise. And it’s on the decline. These are statements that one might commonly encounter days, if not hours, apart. As a global, de-centralized crypto-currency, Bitcoin has proved itself useful in both local and cross-border transactions. However, its value is much too volatile for conservative investors.

It might be good to speculate on the movement of Bitcoin’s value, but you might lose money if you’re not careful. Case in point: prior to the holiday season, Bitcoin shot up to about $1,242 per coin. At present, it’s hovering at around $703. This is bad news for those speculating on Bitcoin by buying the currency and then waiting for the value to shoot up. However, it could be good news for those speculating against the currency by acquiring derivatives or contracts-for-difference taking a “long” position against Bitcoin.

According to economists, smart investors should not look at Bitcoin as an investment instrument itself. Rather, it would be better to invest in companies that offer Bitcoin-related services. For instance, Li Ka-shing, the richest person in Asia, has invested into Bitcoin payment processor BitPay through holdings company Horizons Ventures. This is a sound investment choice, says John Greenwood, London-based chief economist at Invesco, which designed Hong Kong’s pegged currency system.

Greenwood likens investing into such “peripheral activity” with the gold rush, in which investors “made more money out of selling shovels and picks to gold-diggers than anyone ever made out of the gold mine.”

The economist added that Bitcoin is simply not reliable as a global currency because it does not meet three requirements. First, a currency needs to be an effective medium of exchange for a wide array of goods and services. Second, it should be able to provide a long-term store of value, which enables its use as settlement for long-term contracts. Third, it needs to be a universal unit of account.

Bitcoin’s de-centralized nature has actually enabled the currency to become popular in China, where users were able to mitigate government control on capital movement across borders. However, this has also been cited as one reason why China’s government has clamped down on the use of Bitcoin for paying for goods, to the extent of outlawing conversion between Bitcoin and the local currency.

Still, holding on to Bitcoin has proven to be beneficial for certain individuals, especially those who had the currency from the start, prior to its rapid rise in value. A few Bitcoins a couple of years back might already be worth millions of dollars today. But with volatility, the value could be difficult to predict in the medium- or long-term, which is why service providers that offer value through Bitcoin-related transactions might be the winners here.

Source: South China Morning Post