Bitcoin is a speculative asset but not yet a systemic risk

Is there an investment case for the cryptocurrency?

A sign announces a proprieter’s loyalty to Bitcoins, where they are also accepted for payment, at a pub on April 11, 2013 in Berlin, Germany — Sean Gallup/Getty Images

Financial markets rarely miss opportunities to make money. That is as true of cryptocurrencies as anything else. Trading in bitcoin futures began on the Cboe Global Markets this week; CME Group will launch its own futures on December 18th (see article). That has given a further boost to the digital currency’s price, which is up by 1,550% this year. Such phenomenal returns are drawing in waves of speculative money. But is there a fundamental case to invest in bitcoin?

The usual tools of finance are no guide. An equity is a claim on the assets and the profits of a firm; a bond entitles the investor to a series of interest payments and repayment on maturity. Bitcoin brings no cashflows to the owner; the only return will come via a rise in price. When there is no obvious way of valuing an asset, it is hard to say that one target price is less likely than another. Bitcoin could be worth $10 or $100,000.

Instead, investors must weigh the scenarios that enthusiasts posit: what if, say, every pension fund invested 1% of its portfolio in the cryptocurrency? One argument made by bitcoinnoisseurs is that it is a type of “digital gold”. Stores of value are supposed to keep their value; bitcoin, by contrast, is extremely…