Time to take the Bitcoin bubble seriously
ft.com
ft.com
Time to take the Bitcoin bubble seriously
By John Authers
However, governments and central banks are also now taking Bitcoin seriously. This week has also brought news that Baidu, the Chinese search engine, would no longer accept Bitcoins as payment, after the People’s Bank of China ruled that Chinese banks should not process or insure Bitcoin transactions.
So should investors also be taking Bitcoins seriously? There are two levels to this question, as Bitcoin aims to take at least two of the roles played by a currency; first as a store of value, and second as a means of exchange.
Its role as a store of value is encouraged by its founding computer algorithms, which guarantee continued scarcity. This gives it an appeal compared with “fiat” money, created for governments by central banks, where there is no limit on supply.
But, unlike fiat money, nobody is legally required to accept it. As Brown Brothers Harriman’s forex analyst Marc Chandler points out, creating such money remains a monopoly of governments. They are not likely to give it up.
Cryptographic defences
BofA Merrill Lynch’s heroic assumptions suggest that at very best Bitcoins might one day gain a reputation to equal that of silver, which is perceived as worth only a 60th of gold. That implies a total value of about $5bn – far below its recent implicit valuation of $13bn.
However, as a means of exchange, Bitcoin’s layers of cryptographic defences, the ability to pay instantly, and the security that comes with the ability to trace each transaction made with each coin, all offer intriguing advantages.
So far, it is not widely accepted. But this year’s hubbub of excitement over the currency suggests that it could be.
Increased trading in the decentralised virtual currency has begun to attract the attention of regulators
Merrill’s grand back-of-an-envelope estimate is that it might account for as much as 10 per cent of global online transactions, and of international worker remittances (which would again be a remarkable success). On that basis, Bitcoins could fund annual transactions worth $9.5bn in today’s money.
It is easy to poke fun at such huge extrapolations, but hard to come up with anything better. In any case, the point of Merrill’s guesswork is that even if Bitcoin is as successful as it is possible now to imagine, it looks overvalued at recent prices. It is in a bubble.
But this does not prove that the concept has no future. Shares in Amazon.com were also in a bubble in the late 1990s, and yet proved a great long-term investment after the bubble burst. Wild swings in value are typical when new technologies arrive.
Built-in scarcity
It is not possible to conjure up a new precious metal to deal with this problem. But it is possible to conjure up new online currencies and that is already happening.
This could be an investment opportunity. Rather than an alternative to fiat currencies, Bitcoin has a role in a critical trend; the disintermediation of banks. African tribesmen can now pay each other using their mobile phones, without involving a bank. Crowdsourcing systems raise loans over the internet without involving a bank. Internet currencies are part of the same trend.
Does Bitcoin have first-mover advantage? Will other currencies be able to compete? Again, compare with Amazon. It used its first-mover advantage to become the dominant online retailer, as did eBay in online auctions. Yet both contended with plenty of me-too rivals who were briefly valued very richly by the stock market.
In internet search, first-mover advantage was no use to AltaVista, for a year or two as dominant as Google was to become. The same proved true for MySpace among social networks, or AOL among internet service providers.
It is too soon to bet that Bitcoin will be the hegemonic online currency, but there is plenty of time to bet on its competitors.
Where does this leave us? Foreign exchange analysts agree, mostly off the record, that Bitcoin is not worthy of being treated as a real currency.
Buying Bitcoins while their price is so bubbly is nothing more than a gamble. Investing in other online currencies, or in companies that can help the Bitcoin economy develop, looks like a sensible use of a venture capitalist’s money.
Buying Bitcoins while their price is so bubbly is nothing more than a gamble. Investing in other online currencies, or in companies that can help the Bitcoin economy develop, looks like a sensible use of a venture capitalist’s money.
Also from the comments section this one is particularly insightful:
If you want to value Bitcoin's potential properly you have to understand it's at minimum a decentralized payment network which will provide most of the service of retail banking offers for free or minimal fees to all the unbanked of the world. Actually considering how antiquated the banking system is, it will also offer serious competition for the already banked.
Can you imagine a world where anyone can set up a shop on the internet and instantly accept payments from all over the world to sell its product or service without any intermediary ? Well that's only one face of what Bitcoin enables. And It enables a world of possibility after that. If for people who understand Bitcoin, we can't even grasp what's going to be done with this technology. It's like trying to grasp what's going to be done with the Internet in 1990.
So you want to value Bitcoin's potential, you have to compare it to Gold as a store of value and to m1 of major currencies. Anybody that builds a model for Bitcoin's POTENTIAL without landing AT LEAST in the hundreds of billions of $ at minimum is doing something wrong.
Not everything with an exponential curve is a bubble. Technology adoption follows a S curve. And Bitcoin could be the most important technology invented since the Internet.