Earlier this year, Bitcoin had an historic run – from 110 on April 2nd to a record high of 265 on April 10th. Just hours before the peak, I gave this interview (time stamp 8:35 through 10:50), in which I gave my views on Bitcoin the product, and the market. In fact, I said it appeared much like the 1999 internet bubble – which in hindsight, turned out to be quite prescient; as by the time the crash ended a week later, Bitcoin had fallen all the way to 55, down 79%. As always, the “Johnny Come Lately’s” were destroyed – with not a clue what they were investing in…
In listening to my interview, you’ll see I didn’t challenge Bitcoin itself, but simply commented that it is a complex new technology that was not widely understood. In other words, if I didn’t get it, most likely the vast majority of “currency investors” didn’t either. FYI, my good friend Mike Krieger is an expert on the topic; but then again, he is one of the world’s prominent “alternative media” bloggers.
After consolidating for several months – whilst manipulated currencies like gold and silver continued to be artificially suppressed, Bitcoin has recently surged higher – reaching a new all-time high of $270 this morning. Thus, it’s just a matter of time before I start to receive a slew of questions about it; and hence, this piece. By the way, the current rise doesn’t have the same “bubble-like” quality to it as in April; as it has occurred largely outside the mainstream, supported by news items indicating increasing global acceptance as an “alternative currency” (such as this one regarding Baidu, China’s largest search engine company). In fact, I haven’t received a single Bitcoin-related email during the current rise – compared to at least a dozen back in April.
Without making a definitive judgment, I believe Bitcoin may have merit as an investment; although this is by no means a recommendation, and in a million years I’d never put a penny of my own money into it. However, as a currency, that’s another story altogether – and one whose story has yet to be completed. If you read this article, you’ll realize Bitcoin “mining” does in fact involve steep costs – as significant computing power must be secured to produce them. In fact, competition has become so powerful in recent months, that just this week; the leading Bitcoin “incubator” went bankrupt. Thus far, 12 million of the allotted “lifetime supply” of 21 million coins have been produced; although, like fiat currency, who’s to say its creators won’t decree a doubling, tripling, or quadrupling of this “maximum” if it becomes successful enough? You know, like the so-called “debt ceiling?”
Either way, 12 million Bitcoins at the current price of $270/coin only adds up to $3.2 billion – or $5.6 billion if all 21 million coins were “minted.” Thus, it is difficult to believe Bitcoin could ever become a material global currency, no matter how high the price. And as for building a track record of protecting purchasing power– as gold and silver have done for 5,000 years – I’m not willing to “bet” Bitcoins will achieve what no man-made “substance” has been able to accomplish throughout history.
Of course, I’ll “hedge” such commentary by stating that I still know very little about Bitcoin – including a complex “walleting” process of saving and securing one’s “coins.” For all I know, Bitcoin will become a viable long-term investment; or even a currency in certain, technological circles. However, one thing I’m darn sure of is it won’t come close to replicating the unique properties that have enabled PHYSICAL gold and silver to stand the test of time – whilst all other “money” has failed. In other words, Bitcoins may well soar in value, but will NEVER meet the strict definitional standards of money. Then again, Bitcoin may well fall by the wayside – into the dustbin of wannabe currencies.
I hope you read your replies.
Great piece here. Informative and accurate. There is however, one aspect that you over look. The fact that each Bitcoin is divisible to 100 million units gives it more than enough units to become a viable global currency. With 23 million total Bitcoins, that equals 2300000000000000 units of Bitcoin. That is 2300 TRILLION total individual units of Bitcoin. If one satoshi of Bitcoin were equal to one penny of USD, the total US dollar value of all Bitcoins would be 23,000,000,000,000.
Market cap is what matters, not the number of shares. All the Bitcoins in the world – mined and unmined – are only worth a few billion. Splitting them into smaller pieces doesn’t make it more valuable – just as stock splits don’t make companies more valuable. Bitcoin will need to rise astronomically to even become viable as a real currency – amongst its other issues. Not saying it can’t happen, of course.
Divisibility is a feature of money.
If Bitcoin could only be divisible in 21 millions BTC instead of 2300 Trillions Satoshis this would make it unusable for large and tiny transactions. Like having only 100$ bills and no dimes or pennies.
Divisibility increase the utility of money and so the utility of bitcoin.
Don’t forget that one of the drawbacks of BTC transactions is transaction speed.
It takes several hours typically to transfer possession of BTC between parties. I think that the larger the blockchain gets, the greater the processing power of the community of miners has to get to keep transfer times reasonable. If the mining community falls apart, how will BTC be freed from their digital tombs?
Good points Nate
It looks like even Andy H – or others PM hyperfocused people always see the bitcoin animal through the 5000 year lense…. well, curency and even money that is heavely maniplulated like the dollar and pm’s too- are not fairing well in the current situation…. not that they should be discredited- and people should be stacking-
But at the end of the day all people really want is access to the things neded in life- rather than waist time arguing and fighting crazy “leaders” hell bent on continuously screwing things up in the name of their self interests.I glad there are crypto curencies. It puts pressure on the criminals to scale back their plans and eventually faid away off into the distance.
I have not discredited Bitcoin, and in fact went out of my way to highlight its merits. That said, just because it is “up” doesn’t make it a potentially global currency – especially with a “market cap” of no more than $5 billion.
The market cap of Bitcoin in January 2013 was what?
100 M USD?
Now it is 3 billions USD.
Let it a year or two… Rome was not built in a day.
A global reserve currency is not something with a large market cap, it is something useful for global commerce. The market cap will follow the increase of utility.
I didn’t say it couldn’t happen. However, the leap from $3 billion to reserve currency status is another thing.
You are right that the current market cap is extremely low on the scale of global currencies. All I am saying that that the number of units allows for that increase in market cap WITHOUT the need to expand the total supply. Having so many units does not make Bitcoin more valuable, it only facilitates easy division when/if prices go truly through the roof.
Agreed. Let’s just see what happens over the years.
I initially thought that one distinct advantage of bitcoin would be to be able to access your money from abroad. It is becoming increasingly difficult to wire money abroad, so with bitcoins that may be easier to accomplish. However, I wonder if you would actually be able to “cash out” as a U.S. citizen in another country? The reporting requirements are so strict that no foreign bank would likely allow you to convert your bitcoin proceeds into local currency or dollars for that matter. Or if they allow you to so, it would have to be reported to U.S. authorities and they would come after your for tax evasion.
All that aside I believe Bitcoin will ultimately soar to unimaginable highs, but as Jim Willie stated, many of the new bitcoin millionaire at some point will want to convert this phantom currency into real money with a proven track record, which is of course Gold and Silver.
That is why you may want to use something like a localbitcoin trader service.