Over the past couple of months I’ve been toying with a new approach to currency, called Bitcoin.
Bitcoin is a decentralized electronic cash system using peer-to-peer networking, digital signatures and cryptographic proof to enable irreversible payments between parties without relying on trust. Payments are made in bitcoins, a digital currency issued and transferred by the Bitcoin network. Nodes broadcast transactions to the network, which records them in a public history after validating them with a proof-of-work system (thanks Wikipedia).
I’m not going to go into details on exactly how Bitcoins work – you can read some better overviews here, here and here – but my idea has been to pool investment from a few friends to try to capitalise on the extreme volatility of this new currency.
What sort of volatility you ask? This sort:
The chart shows the last trade for 2011 at the leading Bitcoin exchange was at the rate of $4.72 USD.
For the year, Bitcoin’s exchange rate rose from $0.30 — a 1,473% increase. For the fourth quarter, the exchange rate dropped from $5.14 — an 8% decrease. For the month of December, the exchange rate rose from $3.06 — up 54% for the month.
Check out that spike in May. Huge.
…and all based on nothing but pure speculation.
Let’s put those returns in another perspective:
The big blue line is the USD/BTC crossrate (the value of a single BTC represented in US dollars). Compare that to investment returns of other major currencies and commodities. Pretty striking.
The investment theory behind this fund is to take our initial investment, leverage it, trade with a view to profit on these short, sharp spikes, and then get the fuck out before the inevitable reversals of fortune.
My investors haven’t given me their life savings so no one is coming after my kneecaps if this doesn’t pan out. I hope.
There’s some further detail on the background of this idea and general Bitcoin goodness in a new blog I’ve created for investors (or anyone else who might be interested). I’ll be updating this monthly with the status of our progress.
Speaking of bitcoins:
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