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Is your stomach strong enough to take a flier on bitcoin?
The value of the virtual currency can fluctuate wildly—even in a single day. From July 2010 to February 2014, its price was 26 times more volatile than the S&P 500, according to Matt Elbeck, a marketing professor at Troy University in Alabama, who co-wrote a recent study about bitcoin with a colleague, Chung Baek.
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In addition, nearly a half-billion dollars worth of bitcoin disappeared last year from Mt. Gox, once the dominant exchange for bitcoin trading. And regulators are paying increasing attention to digital currencies, adding another element of uncertainty.
For many investors, those kinds of risks are reason enough to stay far away.
Yet bitcoin could have some virtues for certain investors. “It doesn’t trade with stocks or bonds or gold or any other asset that typically appears in a mass-affluent portfolio,” says Nicholas Colas, chief market strategist at New York-based brokerage firm Convergex Group.
There also is growth potential, given that digital currencies are in their infancy. Investment firms show growing interest in the currency and in the technology behind it, which could point to more widespread use.
This year, the value of bitcoin has fallen about 23%, through Thursday, according to a CoinDesk index. Still, a single bitcoin is worth $243.26, up from less than $5 three years ago, according to the index.
Dedicating a small sliver of your portfolio to bitcoin may make sense for a younger, affluent investor who won’t get spooked by sharp swings in value.
Mr. Elbeck says such a stake should represent less than 0.5% of your investments.
And investors who will need to tap the money in the near term—or whose finances would be compromised if the investment became more or less worthless—should stay far away, says Mark La Spisa, president of Vermillion Financial Advisors in South Barrington, Ill.
“You want to try and be a day trader with this, go ahead and have fun, as long as it won’t have a negative impact on your retirement,” Mr. La Spisa says of bitcoin and other risky investments.
Investors can purchase bitcoin online through websites such as San Francisco-based Coinbase. The currency is stored in a digital “wallet,” which could be on your computer’s hard drive, online or in an offline “vault” operated by a storage firm.
Another option could be available soon. Bitcoin Investment Trust, the first publicly traded bitcoin fund, is expected to start trading in coming weeks, according to Michael Sonnenshein, a spokesman for fund sponsor Grayscale Investments, a subsidiary of New York-based Digital Currency Group. Each share of the fund will represent about one-tenth of a bitcoin, minus fees, he says.
