More than seven times as volatile as the S&P 500, bitcoin has minted numerous millionaires but also lost about half its value in the past five months. Are you up for what could be a wild ride?
If so, a hedge fund launched Tuesday may offer an appealing opportunity. Dubbed Coin Capital Partners, the fund plans to apply a bullish buy-and-hold strategy toward the virtual currency. The fund is managed by Samuel Cahn, Sigmund Sommer and Drew Sommer. Both Sommers have experience mining, trading and investing in the currency.
“I think that bitcoin is a really exciting new technology and in many ways we are just on the cusp of consumer adoption,” said Mr. Cahn, managing partner of Coin Capital Partners.
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Bitcoin, a digital currency that is immune to inflation and operates independently of any government, started out trading for less than one thousandth of a dollar in 2009. By November 2013, the value of the currency had soared to more than $1,100. That means someone who bought a dollar worth of bitcoins in 2009 would be worth more than $1 million if he or she had cashed out in November.
But the fairy tale came to an unhappy ending this year. The currency declined sharply in February when one of the largest bitcoin exchanges, Mt. Gox in Japan, was forced to shut down after millions of dollars in bitcoins went missing. The digital money took another blow in March, when the Internal Revenue Service declared that bitcoin was not money, but property, and therefore subject to capital gains taxes.
Today, one bitcoin buys about $440.
Coin Capital Partners thinks that this steep decline spells opportunity. Despite boosting taxes on bitcoin transactions, the IRS decision also issued a strong bullish signal: bitcoin is becoming mainstream.
There are a litany of arguments for why the currency will become ubiquitous. Overstock.com, a major online retailer, started accepting bitcoins as payment in January. Other retailers may soon do the same, as the fees on bitcoin transactions significantly undercut those on credit cards, Mr. Cahn said.
In perhaps the most startling embrace of the digital money, the Federal Elections Committee approved bitcoin as a medium for campaign contributions earlier this month.
If the adoption of bitcoin continues to become more widespread, the price of a bitcoin should rise, Mr. Cahn said. The supply of bitcoins, after all, is finite. It's not as if more units of the digital currency can be printed by a central bank.
But there are plenty of bitcoin skeptics. A common argument is that consumers are unlikely to switch to bitcoin when other traditional payment systems work perfectly well, said Mr. Cahn. Others argue that the currency is at risk of a crackdown from repressive governments such as China, he added. Mr. Cahn, however, isn't convinced.
“I look at the recent deflation in bitcoin values similarly to how I looked at the tech bubble in the early 2000s,” Mr. Cahn said. “Investors became overexcited, and prices rose too fast. Had the price of a bitcoin risen more steadily to its current price of more than $400, I think that people would more easily see the case for optimism.”