Bitcoin as an Investment

So what does bitcoin look like as an asset class right now, and how should investors treat it?

If it's an asset class, it's an incredibly volatile one.

According to an analysis of bitcoin prices performed for The Wall Street Journal by Mr. Harvey, between late 2010 and Wednesday, bitcoin's return in U.S. dollars had an annualized "standard deviation" of about 139%. That means it was roughly 7½ times as volatile as gold and more than eight times as volatile as the S&P 500.

Since last Friday, when bitcoin cost $411, the price of a bitcoin has fallen as low as $387 and risen as high as $782, according to CoinDesk.com, which averages bitcoin prices across multiple exchanges.

Marie Brière, an associate professor at Université Paris Dauphine in France, calculated that between July 2010 and July 2013, bitcoin had an annualized return of more than 370% with 175% volatility. She found that its returns had a weak but significant correlation with gold and inflation-linked bonds, supporting the notion that some investors see bitcoin as an inflation fighter.

Her paper, which was co-authored by Kim Oosterlinck and Ariane Szafarz of the Université Libre de Bruxelles in Belgium, concluded that a small allocation to bitcoin—perhaps 3% of a well-diversified portfolio—could improve one's risk-return trade-off.

But that study was conducted when bitcoin was merely four years old, and even Ms. Brière says investors will have to wait and see which, if any, of bitcoin's characteristics persist.

"I'd be very cautious. Is this a bubble or not? That's very hard to determine at this point," she says.

And yet some firms are already trying to make it easier for investors to get involved.

Cameron and Tyler Winklevoss, of Facebook fame, have filed with the Securities and Exchange Commission to launch an exchange-traded fund, called the Winklevoss Bitcoin Trust, that holds bitcoins. In an email from their lawyer, the Winklevosses said they are working with the SEC to finalize the proposal and hope to launch next year.

SecondMarket, a platform for investing in private assets, has already launched a private fund called the Bitcoin Investment Trust, which holds bitcoins. It charges 2% yearly in management fees and is open only to accredited investors, which for a single person means more than $200,000 in income or $1 million in assets, excluding a primary home.

SecondMarket CEO Barry Silbert says the trust, which is available in certain self-directed individual retirement accounts, has gathered $36 million in assets as of Thursday.

He says that some family offices have made investments and seem to treat it as a small part of their gold allocation or their "risky alternatives" allocation, which includes investments such as hedge funds.

Bitcoin "has a binary outcome," says Mr. Silbert. "There will either be a total loss of principal or a very, very high return."