There is more to Bitcoin than bitcoins. In one sense, Bitcoin is a global, peer-to-peer computer network that maintains a public, mathematically tamper-proof accounting ledger of digitally signed, timestamped transactions. Under the hood, the transactions are denominated in whole numbers – the true unit of account often referred to as a satoshi. More commonly, a unit of account called – perhaps misfortunately – bitcoin is used, each bitcoin being worth 100 million satoshis. The network also ensures that newly available bitcoins are created at a predetermined rate, and fairly distributed to those network participants who provide the computing power required to maintain and secure the public ledger.
The price of bitcoin digital tokens is determined in the open, global, and diverse marketplace, and has increased many orders of magnitude since the first currency exchanges emerged in 2010. Likewise, the daily exchange trade volumes have gone from several thousands of dollars’ worth in early 2011 to many millions of dollars per day in late 2014.
In principle and in practice, Bitcoin technology enables the use of bitcoin tokens as a currency for global, secure, fast, decentralized, irreversible transactions. Inevitably, bitcoins also present an opportunity for speculative investment, including speculative short selling that may in fact prevent formation of price bubbles. Speculation has been arguably the main driving force behind bitcoin price movements over years, and implicitly an important factor in the evolution of the Bitcoin experiment.
To assess the historical performance of bitcoin tokens as a speculative investment, we will look at potential returns for any given pair of entry and exit time points since January 2011. The historical price data from four major exchanges – Mt.Gox, Bitstamp, btc-e, and Bitfinex – were obtained from Bitcoin Charts, and used to calculate a volume-weighted average price. The returns were then calculated as ratios of exit to entry prices for all possible combinations of dates.
The data spans over four orders of magnitude, and is thus best viewed in the logarithmic scale. Both extreme ends of the scale originate in investments made in 2011, with prospects of 90% losses and thousandfold gains depending on timing. The following two years ensured gains for all but those who invested in January 2012 and April-May 2013, and exited within months. Year 2014 has been an anemic entry point in the big picture, with a mix of comparably tame gains or losses thus far.