Summary: Bitcoin works more like a digital store of value than a digital currency or a financial asset. This means that trying to estimate an intrinsic value for Bitcoin is pointless, and prices fluctuate according to demand trends as opposed to fundamental value. When making buy or sell decisions in Bitcoin, a quantitative trend following system could be a smart way to maximize the risk and return equation. This idea was discussed in more depth with members of my private investing community, The Data Driven Investor.

What Is Bitcoin?

There are multiple possible ways to describe what Bitcoin (GBTC, BITCOMP) really is. Leaving the technological and sociological considerations aside, this article is focused on what Bitcoin means for investors and traders.

Bitcoin was originally intended as a payment method or a digital currency. From the original paper called Bitcoin: A Peer-to-Peer Electronic Cash System:

“Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model. Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make non-reversible payments for non reversible services. With the possibility of reversal, the need for trust spreads. Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party.

What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”

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