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Why bitcoin is more than a made-up investment bubble

·Michael Santoli

Half a year after bitcoin fever peaked with a price surge above $1,100, most financial types still consider the virtual currency a faddish investment bubble.

And, of course, that’s exactly what the programmers and utopians backing bitcoin would like and expect to see – deep skepticism among the financial mainstream toward an alternative global payment medium.

A new Bloomberg Global Poll of finance professionals found that 55% say bitcoin represents an unsustainable investment bubble, and another 14% contend it’s on the verge of a bubble. This suggests that those bidding for bitcoin near current prices just above $600 are merely participating in a speculative mania in an asset with little underlying value.

Yet, as I discuss with Yahoo Finance host Milanee Kapadia in the attached video, it’s important to separate the potential for bitcoin as a useful payment system from its purported merits as a store of value with upside appreciation potential.

As a global, anonymous, secure way to purchase goods and services or move funds around, bitcoin is an ingenious and seemingly effective effort.

Bitcoins are produced by computers, which compete to solve intricate math problems. A specific number can be created each year until, in a few years, a finite limit is reached and the number of bitcoins in existence is fixed for all time. Opening an online account allows a user to hold or send coded, verified bitcoins largely anonymously at no direct cost. Some 5 million bitcoin “wallets” have been created, and more than 60,000 vendors accept them in some form.

In this way, the system can be viewed as a sort of lower-cost PayPal, the eBay Inc. (EBAY) unit that allows for online payments and money transfers.

The secretive, outlaw vibe of the bitcoin phenomenon has made it accommodative to illicit trade in drugs and weapons, but increasingly legitimate consumers and businesses are finding room to experiment with it.

While many influential financial figures, including J.P. Morgan Chase CEO Jamie Dimon and investor Warren Buffett, have dismissed the potential of bitcoin as an important currency alternative, plenty of forward-thinking investors are willing to give it the benefit of the doubt for now. Venture capitalist and Web pioneer Marc Andreessen and marquee stock-fund manager Bill Miller are investors in bitcoin.  

Just this week, New York State introduced proposed regulations for “bitlicenses,” which would enable businesses that deal in bitcoin to do so in a sanctioned, legal way.

While this goes some distance toward legitimizing the currency, the move has also drawn criticism from bitcoin partisans as an intrusive and heavy-handed measure that in some ways undermines the very virtues of bitcoin.

Divining what a bitcoin should truly be “worth” in dollar terms, though, is a much squishier exercise. After hitting a high of $1,100, the price crashed below $400 in April. Since then, the price has methodically marched to the recent level around $618.

Some investors simply estimate that if bitcoin pulls just a small portion of the “alternative money” crowd from the $8 trillion gold market, each bitcoin could be worth substantially more than its current quote.

Maybe. But governments can, in theory, shut down bitcoin commerce and the failure of major bitcoin exchange Mt. Gox several months ago suggests an immature market operating in a gray area.

This all suggests bitcoin is far more than just a flighty online fad or made-up investment bubble, but is not nearly the can’t-miss future of money that its ardent fans insist.

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