It's been a wild ride for bitcoin investors in the last week.
The news that the CME Group would launch a futures contract on the first and most highly valued cryptocurrency in the market sent the price of each bitcoin flying to a record high of $7,879 last week — more than 10 times its price of just a year ago.
On Wednesday, however, sentiment reversed sharply, as a plan to make the bitcoin network more practical for users fell apart. It was reason enough for scores of hedge funds now trading the digital currency to take some profits. Bitcoin was down 30 percent by Saturday.
"Bitcoin [and other cryptocurrencies] are not for the faint of heart," said Ian Weinberg, CEO of Family Wealth & Pension Management. "I expect a lot more upside and downside volatility.
"It's getting on the radar screen of Wall Street now, but this is speculation. I don't consider it an investable asset class yet," he added.
Neither does Amy Hubble, a certified financial planner and founder of Radix Financial. Like Weinberg, she is fascinated with the potential of bitcoin and the blockchain technology underlying it. The run-up in price hasn't escaped her notice, either.
"Advisors should not stick their head in the sand about an asset class that returns over 800 percent in a year," said Hubble. "As a fiduciary, I have a responsibility to research and be conversant on emerging investment opportunities."
Hubble, however, has gone deep enough into the weeds on bitcoin to know that she's not yet ready to invest in it. "Bitcoin and other protocol tokens don't have any cash flows, they don't pay dividends, there is no way to systematically determine demand growth for them, and I don't have the technical expertise to determine the value of one cryptocurrency over another," she said.
The investment story for bitcoin and cryptocurrencies is attractive to more than just techies and libertarians, however. The blockchain technology employed by cryptocurrencies is a major innovation. It offers a secure way to execute transactions worldwide without intermediaries taking their pounds of flesh: no central bank, no clearing firm, no "trusted" third party. It has the potential to lower costs and improve security by cutting out financial middlemen for all sorts of transactions in a wide range of markets.
"It's an alternative currency with no third-party mediator audited on a daily basis by its own users," said Samuel Boyd, an advisor with Capital Asset Management Group. "If cryptocurrencies become widely accepted, bitcoin is the gold standard."
Bitcoin: The pros and cons
• Big gains
• Interesting topic for cocktail parties
• Manipulation of the ledger
• Government regulation
• Total loss of money
The so-called blockchain underlying cryptocurrencies essentially constructs a public ledger of transactions and replicates it across all the computers in a network, making it virtually impossible for people to reverse transactions or to double-spend currency. Bitcoin owners have a continuously updated record of every transaction in the currency since it was created by the mysterious Satoshi Nakamoto in 2009. Every 10 minutes a new block of transactions is added to the chain and transmitted across the network.
Theoretically, people with enough computing power — such as a coalition of bitcoin miners, who help maintain the integrity of the network and get rewarded with new bitcoins — could manipulate the blockchain, but it would likely not be in their best interest to do so.
"There could be malicious actors, but as bitcoin owners, they would probably hurt themselves more than anyone else," said Matt Green, a professor of computer science at Johns Hopkins University.
As a medium of exchange, bitcoin has thus far been a flop. While plenty of companies will accept bitcoin as payment for their products and services, few consumers have taken advantage. It takes a lot of computing power and is inconvenient for small-value transactions.