Is Bitcoin the world's most perfect speculative material?
I'm sure that it can't have escaped most people's attention that the price of Bitcoin has absolutely soared in recent weeks. The price of the innovative, cryptographically secured, digital currency has burst through some newsworthy levels - reaching $100 per bitcoin last week while the total value of all bitcoin in circulation reached a net value of $1 billion shortly after. Since Easter the price rise has accelerated to the point where I wouldn't be surprised if it burst through the £100 per bitcoin barrier within 48 hours.
These astonishing moves have caught the eye of the BBC, Economist, Moneyweek and the international press. This added media attention is adding fuel to what is already a very hot fire and the question that nobody seems to be able to answer is - how high can this thing go?
What the hell is a bitcoin anyway?
Before even attempting to answer how high it can go, it's worth recapping on what a bitcoin is to those who are completely befuddled - there's a good primer on Wikipedia, and a quick web search will throw up dozens of links that will give a fuller explanation than the next paragraph.
I am no expert, but have read up as much as most people will ever be willing to - so here's my take. In brief, it's a decentralised, open-source, digital form of money transacted peer-to-peer to and from virtual 'wallets' that can be downloaded from bitcoin.org and third party websites. It was born from the mind of an anonymous Japanese hacker (or group of hackers) who is/are generally known by the avatar "Satoshi Nakamoto".
The currency is secured not by the faith of e.g. the US government, but by trust in the cryptography that backs it. The money supply of bitcoin grows gradually, as new coin is paid to programmers who spend time verifying the so-called 'blockchain' - the history of all transactions in the network to ensure no duplicate transactions.
You can buy or sell bitcoin for regular currencies such as the pound or dollar and can 'spend' your bitcoin at an increasing number of venues as we'll see. 80% of the transactions between Bitcoin and 'real' money happen at the website MtGox which is Japanese owned.
Who is using Bitcoin?
One of the reasons that bitcoin has gained notoriety and acceptance is because transactions made in it are completely anonymous. As a result it's gained much use amongst illicit activites on the web. A website called The Silk Road allows members to buy drugs such as cocaine and marijuana anonymously while paying with bitcoin, where reportedly at least $2m per month is changing hands. Meanwhile US poker players (where paying with real money is banned) enjoy transacting in bitcoin as an alternative.
But bitcoin isn't just being used amongst in black markets. Bitpay ( a paypal for bitcoin transactions ) announced yesterday that they had added 4,500 merchants and were transacting over $3m per month. Meanwhile there are plenty of reports that some VCs in Silicon Valley are only accepting bitcoin startups, while typical bitcoin startup investments (of which there are many) are reportedly between $500k and $1m.
The VCs love bitcoin as it's uses are manifold - imagine you want to send money across the world. If you have to choose between a $40 Western Union transfer and a completely free Bitcoin transfer what do you think the poor of the world will chooose? Of if you want to start an online business in Tanzania which transacts completely internationally? Bitcoin, or something like it, has the ability to disrupt and disintermediate the traditional banking world.
Currencies generally act as both a means of exchange and as a store of value. In terms of bitcoin's use as a means of exchange, the value of the currency is clearly very low - the bitcoin economy is stil pretty negligible though growing at a clip. But the price is rising ferociously suggesting that many are buying it as a store of value or more likely just out of sheer curiosity…
Why bitcoin gets the blood going...
A few gathered thoughts on what is blowing this bubble.
We perhaps ought to be prudent and ask what the downside for bitcoin is - how low could it go? Bitcoin may be destroyed by governments the world over who have a vested interest in stamping out any threat to their sovereign ability to control the money supply - although most agree that this is unlikely. There's also the serious risk that a digital construct like Bitcoin can be completely hacked - given that the programmer behind bitcoin is a mythical anonymous programmer rather than a verified legal individual you can understand why some are concerned. If you think it's bad that the UK or US government can debase the £ or $ at 4% annually then imagine if bitcoin was debased rather more aggressively - frankly, yes it could go to zero.
But if bitcoin really is as secure as its proponents suggest then there's no reason why it can't continue to rise in value over the long term. This is a bubble that is fueled as much by curiosity as by belief. But anyone holding bitcoin or buying it has to expect a very, very wild ride as it has crashed many times before.
Given all the above, I can't help but feel that bitcoin is the ultimate raw bubble material - it's only worth what people will it to be worth. This article is written on a day that Bitcoin reached $137, up over 40% in a matter of days. That suggests either a step change in demand or a blow-off top. I reserve judgement. George Soros may have once said that "when I see a bubble I buy", but with this bubble you'd better hold onto your hat.
Please join the conversation and air your thoughts in the comments below.
[Disclosure, I hold zero bitcoin ]
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