The currency of the internet, Bitcoin, has developed rapidly over the past year. Today, the price and volatility of Bitcoin are one of the most liquid, if not the most liquid financial asset in the world.
At the present time, there are a number of new entrants into the market who are all looking to make a splash and are experimenting with a variety of models in order to see which will win out. We could spend a great deal of time discussing the performance of Bitcoin and its status as a currency, but we’ll try to keep it simple by focusing on some of the key factors.
Price and Volatility. Because of its low liquidity, it’s no surprise that price and volatility are inversely related. In other words, the more volatile a currency is, the less valuable it becomes. However, at this time, the volatility in Bitcoin is much greater than the volatility in other traditional currencies, like the US dollar or the Japanese yen. Given that, it makes sense to compare the volatility of various currencies.
Historical performance. Since there is no central bank behind Bitcoin, we can’t easily get an accurate and up-to-date look at its performance in the market. We can, however, use recent data points from several different times periods to assess whether or not Bitcoin is up or down over the past few years.
Current condition. The most obvious characteristic of any currency is its current condition and whether it is increasing or decreasing in value; that and the ability to make transactions without incurring foreign exchange costs, is likely to be the determining factor in the price and volatility of a particular currency.
Political risk. Given that Bitcoin is not controlled by any central bank, there is an inherent political risk.
Long-term opportunity. Because of its strength in volume, there is likely to be substantial growth opportunities for the technology, which can help support the demand for Bitcoin in the future.
Software, hardware, and infrastructure. Currently, the largest component of the Bitcoin network is the software, which helps facilitate the process of computing and checking transactions. The protocol was developed to enable people to transact without a third party and the hardware was developed to run the software.