A currency has intrinsic value relative to real assets, Murray explained.
“The value of a currency is also contingent on the belief in a government to maintain the rule of law and fiscal responsibility, and the belief in central banks to execute responsible monetary policy.”
With that in mind, bitcoin is not a currency, but could have value to certain investors.
“The main reason is if you don’t want people to know what you’re doing. It is well-suited for criminal activity, but also activity that is anonymous but not necessarily criminal,” Murray said.
The second reason is speculation. Investors with a short-term, high risk appetite who buy and wait for the value to rise and hopefully sell at a profit.
“The third is the only possible legitimate use for bitcoin. If someone lives in a country where there is no faith in the government. Zimbabwe, for example, or Syria which is experiencing high geopolitical risk. Then bitcoin might be a way to store assets and create certainty. But then again, you could argue in this situation why not put assets in US dollars?”
He added that he has no idea where the valuation of bitcoin is headed. “It’s has been people just buying and the flows are all one way.”
A new futures market for bitcoin that opened in Chicago this month allows speculators to bet against the currency, and it will show whether bitcoin’s extreme rally can continue.
Ponzi scheme
Former investment banker David Webb, who examines regulatory issues in Hong Kong, has joined regulators in Asia who have warned the public about investing in crypto-currencies.
Bitcoin, Webb writes, is the “world’s first distributed, decentralised Ponzi scheme. No single operator is running it, and everyone has a chance to participate in it, but its value is determined purely by the weight of money coming into it and the willingness of holders to sell it.
“Like any Ponzi scheme, earlier participants came in at lower cost, and are now receiving much of the billions of dollars (yes, really) that newcomers are putting in.”
