Over the past week Bitcoin fully recovered from its weekend flash crash (from a top of $395 down to $290) and seems to be going in the direction of $500. The growth is still way too fast in my opinion, but with my Bicoin holdings I don’t complain of course.
At the moment I spend 1-2 hours per day reading about and analyzing Bitcoin, and based on this I believe that the current spike in prices is mainly coming from China. Why? Because Chinese see Bitcoin as a new asset class. Most Chinese can only invest in the domestic stock market (which is perceived to be full of inside trading) and real estate. They can’t invest outside China. Bitcoin gives them something new to invest in and many are jumping on to this new opportunity without really knowing too much about it and just hoping to make a lot of money. Right now most people do well, but of course a crash may happen when everybody should start selling.
Next to that Bitcoin also gives Chinese a relatively easy way to obtain foreign currency without going through the grey or black market. The Chinese Renminbi is not freely convertible, so you can’t just go to a bank to change them to US dollars. However, you can change RMB to Bitcoins, and these Bitcoins can be changed to US dollars. From personal experience I know this is an important issue, even for some Chinese friends in Vancouver that can’t get their Chinese money out in a legal way (money they legally earned, but that’s stuck in RMB bank accounts).
Because of these speculative effects it’s impossible to predict where the Bitcoin will be 3 to 6 months from now. It all depends on how many Chinese will enter the market. Looking at volumes on Chinese exchanges I believe this is still the beginning of what is to come and part of a self-fulfilling prophecy: the price goes up so more people buy, which causes the price to go up even further. One day there may be a crash and then the real value of Bitcoin becomes more important.
But what is this real value of a Bitcoin and more importantly, how high could it be eventually? With eventually I mean a timespan of 5-10 years, the time that I plan to keep most of my Bitcoin. The value mainly depends on what Bitcoin will be used for. For example, I strongly believe that one of the first things that will happen, is that Bitcoin will take over all the current business of Western Union (money transfers to less developed economies). Why? Western Union charges about 10% in fees! Bitcoin is virtually free and transactions happen instantaneous. Based on the current value of Western Union you can calculate the implied value of Bitcoin, which would be around $880.
I think Bitcoin will be much bigger than just Western Union. What will happen if it takes over the role of Paypal (which is also very likely)? In that case the implied value of Bitcoin would be $1950. And you should add up these figures if you believe that Bitcoin will disrupt both Western Union and Paypal’s business.
It gets really interesting if you start looking at what would happen if Bitcoin would take over just a small share of the gold market. That is, if people would use Bitcoin as a store of value instead of gold. In a way that is what is happening now already in China, although it’s probably not a substitute for gold. In case Bitcoin woul just take over 1% of the role that the gold market has, its implied value would be almost $8000. Of course if it takes over 1% it will likely take over more after a while, so watch that closely if you hold Bitcoins.
Some people are even more bullish than this, for example the Winklevoss brothers. They announced this week that the market cap of Bitcoin could be 100 times the current value. They are among the biggest owners of Bitcoin, so this may be wishful thinking, but the fact that they say this publicly means that they at least have some belief in this.
In the short run a lot can happen to Bitcoin. For sure the volatility will remain extremely high and possibly there will be a big crash because speculators cash out before more people really start to use Bitcoin. But in the long run I believe that Bitcoin has real value. The Bitcoin protocol has so many potential applications that there will be a big ecosystem built on top of the crypto currency. For that reason I remain very bullish on Bitcoin, despite the crazy increase in price over the past days and weeks.
To keep things in perspective, tomorrow I plan to publish an article on this blog about the risks I see for Bitcoin.
I love that you are really trying to estimate a value for the Bitcoin. You are right that services like Western Union and Paypal need to disturbed; they over charge.
However, Bitcoin is way to volatile. If I want to transfer 1000 USD through any service, I dont want the risk that in the end I loose 200 dollars cause of that.
It’s not really likely that Bitcoin will become a ‘quiet’ currency, cause there’s just no clear mechanics to get to an equilibrium price, neither is there a central authority to support it. The protocol is fixed, the upper bound of 21 million can’t be changed.
With the rise of Bitcoin, it only becomes more likely for an alternative crypto currency to emerge. If this alternative has 4 times less volatility than Bitcoin has (it doesn’t matter that the price is 10 times lower) then i guess that’s more interesting for consumers to use in these kind of transactions.
Nico, I think the current extreme volatility is temporarily. The upper limit of 21 million coins is no big deal and sort of arbitrary, because each coin can be divided into 100 million Satoshis. When the market cap goes up people will start quoting in milli- or micro-Bitcoin (this might happen soon), so the value of 21 million is irrelevant.
In my opinion it’s a good thing that there is no central authority that can influence the rate, history has shown that they are not good at their job and that in the end the general public will pay the price (see for example the excellent book The Great Deformation by David Stockman). A central authority might be better in the early stages of a new currency (like right now for Bitcoin). In the long run the higher market cap will make it more stable: at the current cap of $5 billion it’s easier to crash the market (especially when most of the value is based on speculation) than when the market is a factor 10 or 100 bigger. Once there is more economic activity in Bitcoin it will also automatically become more stable.
Next to that I think that eventually people will think in Bitcoin and not in the USD value of Bitcoin, but that will still take a few years.
BTW, if you are a merchant and receive $1000 in BTC you can immediately change it to USD, so there is no real exchange risk. If the BTC takes off merchants will both buy and sell in BTC, so then the USD value will be less important as well.
There will be other currencies, but so far altcoins like Litecoin show similar volatility as Bitcoin. When their market cap is smaller I believe they will eventually be more volatile than Bitcoin.
Thanks to my father who shared with me about this blog,
this blog is in fact awesome.