Buying a Bitcoin: (Slowly) Trading Through an Unregulated Market

In October, the founder of the online drug marketplace Silk Road, James Ulbricht, was arrested for trafficking and murder conspiracy charges. He was also found to be in possession of roughly $80 million worth of the digital cryptocurrency Bitcoin.

The subsequent media attention foisted on bitcoin piqued our curiosity. To explore the trend (or possible seismic shift) towards online-only currency, Equities.com decided to engage in an experiment where we’d delve head-first into the bitcoin market and buy one for ourselves.

As bitcoin lacks a backing central government as well as a sanctioned currency exchange, we had to pick one of the several independent online traders. After weighing options, we went through San Francisco start up Coinbase, and bought one bitcoin for $126.44 US.

Well, “bought” meaning “locked in.” Five days later, our virtual bitcoin “wallet” remains empty, though the money has cleared out of our account.

Waiting is the Hardest Part

According to our wallet, our digital currency is in limbo, still waiting to be transferred into our account. Apparently wait times for first-time buyers are often subject to delays. Apparently our bitcoin is locked up at the price we bought at, but we couldn’t exchange it out if we wanted.

Which, if we were so inclined, could net a nice take. On Oct. 15 that bitcoin we bought for $126.44 five days ago would now be worth $140.41. That means, excluding exchange add-ons (which are around one percent per transfer) a five-day play in the bitcoin market would net a return of just over 11 percent.

11 percent in five days. But not atypical for bitcoin.

Bubbles n’ Crashes

In a developed market, volatility of that kind would be cause for serious alarm, but in bitcoin, which is still very much stabilizing, that kind of movement is the norm. Take a look at the price performance of bitcoin over its history, courtesy of Blockchain:

Notice that action in early April? The price quintupled in value before crashing on April 11, triggering a failsafe halt in trading. While reports at the time that bitcoin was just another 1700's Dutch tulip bubble popped up immediately, the currency has found some relative stability, hovering between $80 US and $150 US since the crash.

Still pretty wild indeed, but the currency price is more akin to say, a developing country, than a Dutch tulip. Even BRIC country India has seen their currency lose a third of its value this year.

Of course, India had a central bank to address the plunging price of the rupee.  Bitcoin does not. The digital currency’s proponents, often free-market types who believe in the invisible hand and whatnot, see the lack of price control as a feature, not a bug.

So, 11 percent in five days. Quite a swing, but still dwarfed by the volatility of earlier in the year. Whether bitcoin can stabilize remains to be seen.

With Currencies, it’s Physical Exchanges, Trust or… Keep Waiting

There’s a currency exchange around the corner from the Equities.com office where a person can turn US dollars into one of ten different currencies in about ten minutes. Bitcoin, of course, isn’t one of them.

Of course, those exchanges work in physical currency, which sets it apart from digital currency. Using a company like Coinbase takes exponentially longer than a physical exchange, which is certainly going to deter outside investors from sinking “money” into bitcoin.

This is because at its heart companies like Coinbase trust the US dollar more than bitcoin. They need the cash verified and in their coffers before they perform the exchange. Which, of course, slows things down considerably.

Until bitcoin gains more trust, there will always be a discrepancy between the exchanges.

We’ll keep posting back if (and when) our exchange clears and we can play the market.