
Bank of America's Research Report on Bitcoin [pdf] - WestCoastJustin
https://s3.amazonaws.com/s3.documentcloud.org/documents/885843/banks-research-report-on-bitcoin.pdf
======
debugunit
They quote a "Maximum fair market value" of $1300 based on a couple of
different methodologies.

In my (limited) experience, when banks forecast prices (for stocks, indices,
FX rates etc) they always quote a number within a reasonable-sounding
percentage of the current price, because not to do so risks being wrong and
looking stupid.

This means that most of the time they are not far out, and when it really
matters (eg 2008) they are miles out (and so is everyone else).

So even if BofAML actually thought that the "maximum fair market value" was
significantly higher than $1300, I doubt they'd have said so, simply to avoid
the reputational risk.

~~~
jsmcgd
Totally agree. This figure is ridiculous. I actually laughed out loud when I
read it. Like anything the price is based on supply and demand. The supply is
fairly predictable. The demand is a complete guess at the moment. A maximum
market capitalization of $15Bn? Why? The 100 fold increase risks getting ahead
of its fundamentals. What fundamentals? The nature of Bitcoin since its
inception has been expotential growth. I'm not saying that will continue
forever - it can't - but there's nothing to suggest that this rate of growth
will stop when that value of a bitcoin reaches $1300.

Anyone can predict a change of a few percent in the short term and be correct
to within 10%. But where does that get you? Which one of these financial
analysis publications told their readers something useful, like in 2007
there's a financial crash coming or 2009 invest heavily in bitcoin? None.

Sorry, that was a bit ranty.

~~~
james1071
Supply is not predictable as there will be substitutes.

~~~
simplemath
The ecosystem and brand awareness of Bitcoin is novel though. It will take a
full transition from people becoming marginally aware of Bitcoin to
comfortably trading in cryptos before a "replacement" even one with a better
design - and IMO there hasn't been one yet - threatens or supplants BTC.

------
cs702
Interesting. I used essentially the same methodology nearly three years ago to
estimate the potential maximum price of Bitcoin over time, but I reached a
different conclusion: [http://cs702.wordpress.com/2011/05/29/on-the-potential-
adopt...](http://cs702.wordpress.com/2011/05/29/on-the-potential-adoption-and-
price-appreciation-of-bitcoin-in-the-long-run/)

The main difference between BofA's analysis and mine is that I see Bitcoin as
a _far superior_ alternative for many financial and other types of
applications. For one, Bitcoin as a platform provides a global, decentralized,
irreversible log of programmable transactions. For another, bitcoins as
"money" are easier to secure, transport, hide, and backup than all prior forms
of money ever used by civilization. (Actually, no prior form of money ever
used – whether made of bank credits, paper, metal, or other substances[1] –
could be backed up like a Bitcoin wallet.)

Therefore, _if_ Bitcoin continues to work as intended (i.e., proves immune to
attacks) and gets easier and safer to use (for non-technical people), it will
slowly gain credibility in the public’s mind, _not just as medium of exchange
and store of value, but also as application platform_. Over a period of many
years or even decades, as the world gradually learns via trial-and-error how
to use it, becomes familiar with its properties, and ultimately comes to trust
it, nothing can prevent Bitcoin from gaining as much credibility as other
alternatives, including gold.

\--

[1] I highly recommend Nick Szabo's essay on the origins of money:
[http://szabo.best.vwh.net/shell.html](http://szabo.best.vwh.net/shell.html)

~~~
3pt14159
(If you didn't read the article, cs702 thinks bitcoin could hit $90k.)

I still think you are off. The fractional reserve system warps incentives too
much.

1\. The world needs more than $600 of float. And most people think they have
that. The difference is that its wrapped up in the fractional reserve banking
system.

2\. Due to inflation uninformed people are bullied into investing in mutual
funds, stocks, housing, etc. with their savings. Just the _existence_ of
bitcoin as a major worldwide currency could transform the traditional saving
model. If a 30 year old puts a days wages into an account and can expect a
days wages out when he's 80 years old then he can drastically simplify his
retirement. He can avoid speculative bubbles and bad mutual fund managers.

3\. National currency reserves are currently done with sovereign debt - with
the idea being that if a nation goes bankrupt they'll just inflate their
currency anyway and the currency reserve may as well be in bonds. If Bitcoin
were to become a major world currency, the reserves could be in actual
Bitcoins.

All of this to say I still think that there is a 90+% chance that bitcoin will
fail, but on that remaining percent, the limit higher than 100 times today.
I've done the math a couple ways and I end up with $100k to $10m as my
outliers given that bitcoin becomes a world currency.

~~~
onebaddude
> _" Due to inflation uninformed people are bullied into investing in mutual
> funds, stocks, housing, etc. with their savings."_

It's not bullying, it's the foundation of capitalism; that is _putting capital
to work_ , not putting it under your mattress.

I'm satisfied that Bitcoin (or whatever succeeds it) exists, merely as a check
against corrupt government. It's good that the money printers know there's an
alternative. But I'm not ready to ditch the current economic paradigm, which
has created more wealth for more people in the past 200 years than any point
in human history.

People are disillusioned if they believe there were significantly more
economically stable periods in history. Believe it or not, smart people are
actually concerned about, working on, and _resolving_ current issues. It
doesn't happen overnight.

~~~
3pt14159
No, the foundation of capitalism is private property. Coercing individuals to
accept a currency for debt payments and then inflating that currency thereby
manipulating individuals to invest in markets that they don't understand is
not capitalism.

------
codemac
The actual pdf, as documentcloud was messing up the rendering of the graphs
and spaces between letters:

[https://s3.amazonaws.com/s3.documentcloud.org/documents/8858...](https://s3.amazonaws.com/s3.documentcloud.org/documents/885843/banks-
research-report-on-bitcoin.pdf)

~~~
ryanjshaw
Thanks. I really don't understand the purpose of these annoying poorly
implemented document sharing sites when the original format is widely
supported.

~~~
jwr
I believe the purpose is to "drive traffic", "build user base", "engage
users", and later "monetize". Without supplying much value in the process,
which is why we are annoyed.

~~~
mercer
I think that's not doing DocumentCloud justice. While I realize this is a
precarious argument, I find it hard to believe that Jeremy Ashkenas, an active
HN member, creator of Backbone and CoffeeScript, and someone I've come to
respect, would work for a company that offers no value.

~~~
jwr
I have a lot of respect for Jeremy, but respect (like trust) is not
transitive.

I see little value in taking a PDF and making it available as images online.
Is there really a web browser that cannot display a PDF?

~~~
mercer
Maybe you're right, but in this case I do think it is somewhat transitive.
Based on what I know about Jeremy, I'm inclined to think he is successful
enough work somewhere that he considers 'worthy'. But I'm not certain enough
to strongly argue this point :-).

------
cshimmin
I am surprised to learn there are only 2,100 trillion _Satoshi_ (smallest unit
of bitcoin, equal to 1e-8 coin). For comparison, the Gross World Product [0]
is roughly $85 trillion, or 8,500 trillion pennies, and growing (almost) every
year.

I'm no economist, but wouldn't it be a long-term problem for bitcoin to _not
have enough units_ to represent the world's wealth? Or does the inherent
deflationary nature of BC remedy this somehow?

[0]
[http://en.wikipedia.org/wiki/Gross_world_product](http://en.wikipedia.org/wiki/Gross_world_product)

~~~
bberrry
As I've read it, the protocol offers support to be divisible even further.

~~~
rejschaap
Or bitcoin backed currencies, given bitcoin will someday be somewhat stable.
But this is still far away, worrying about this is like a startup worrying
about scaling their infrastructure to twitter-sized userbases when they don't
have a product yet.

------
AlexanderDhoore
"As Bitcoin becomes more popular, competitors will face higher barriers to
entry, making it less likely they will be successful in supplanting Bitcoin’s
market share. Several other digital currencies with similar features to
Bitcoin have been introduced with limited success."

They think it's a “Winner Takes All” system. I completely disagree. If one
cryptocurrency gets accepted, others will be right behind it. It's all
automated, it's all decentralised. There's zero reason bitcoin should be the
only one.

~~~
leovingi
Yeah, except, you know, the infrastructure behind it which is getting harder
to replicate by each passing day, the amount of money being invested in
Bitcoin companies, the first-mover advantage, the fact that no other alt
currency is being accepted by merchants and the fact that most of these alt
coins offer 0 advantage over Bitcoin, with the exception of namecoin, for
example, which is unique in it's own way.

~~~
AlexanderDhoore
Maybe, maybe not. I'd like to compare it to social media. Facebook has a
massive user base and is very hard to defeat, because there's no way in for
competitors. But Bitcoin has no central servers, no one company calling the
shots. Someone, somewhere could decide to exchange Bitcoins for Xcoins. Then
Xcoins could exist next to Bitcoin, no problemo.

~~~
leovingi
I agree, they could exist. But why would anyone want Xcoins, Ycoins or Zcoins
instead of Bitcoins? It's not a choice between meaningless desktop wallpapers
or your favourite cheeses - this is a currency. And for that you need faith
that other people will accept it.

~~~
betterunix
Why would people want Bitcoins in the first place? Whatever the source of
demand for Bitcoin was in 2009 (when it was monopoly money) should be equally
applicable to competing systems today.

~~~
leovingi
People started playing around with Bitcoin because it was something new and
exciting, it was truly the first of it's kind! Ideas were being thrown around,
more and more people started joining the ecosystem, mining was getting really
competitive, Bitcoins found their place on Silk Road, etc.

The point I'm trying to make is that Bitcoin was first! And all that
excitement and experimentation over time translated into monetary investments
and architecture, something the alt coins will have to work really hard to
obtain! Not saying it's impossible, just highly unlikely.

~~~
betterunix
You have not actually answered the question. Experimentation and competitive
mining do not translate to demand. Why did people ever start exchanging
valuable things for Bitcoin?

~~~
leovingi
I did answer your question, read it again. Do you think that the guy who sold
a pizza for 10'000 put some sort of actual value on Bitcoins? No, it was all
good fun. You can also include in the mix the idea that this technology seemed
like it might go somewhere at the time (still does!) so it might not have been
the value at the time that people were putting on Bitcoins, but the value in
the future. It's not that easy answering those kind of questions to be honest,
without polling everyone who was involved in the community from the beginning
and asking them what was their reasoning. So I can only speak for myself.

------
nhaehnle
What I find interesting is the chart where they estimate daily mining revenue
to be on the order of $10 million/day, assuming current prices. Probably, that
computation should be easy to verify using the various Bitcoin websites.

Fundamentally, Bitcoin is a transaction ledger. I suspect a ledger supporting
the same volume of monetary transactions could be implemented using a single
moderately sized server. Even if you calculate with decent margins and fail-
overs, the true cost of providing _most_ of the functionality of Bitcoin is
more like $1000 _per year_. (I'm not calculating software development, since
the Bitcoin software development also doesn't figure into those $10 million /
day).

How valuable is the fact that Bitcoin is decentralized and therefore very
difficult to control for governments? Is that worth $3000 million per year or
more? And is there truly no alternative way to get there that is cheaper in
terms of computing power?

If you're long BTC, it seems to me that that's what you're betting on.

If the answer were No to either of these questions, there would eventually be
a correction.

~~~
gwern
> What I find interesting is the chart where they estimate daily mining
> revenue to be on the order of $10 million/day, assuming current prices.
> Probably, that computation should be easy to verify using the various
> Bitcoin websites.

One thing I like to point out is that right now mining is over-subsidized by
the basic protocol: why is the block reward 25btc (or whatever it is now)?
It's completely arbitrary and is paying the miners more than their services
are worth (hence the arms race to earn as much of the reward as possible).

The point of mining is to secure the blockchain and render it infeasible to
perform double-spends, right? But double-spends are not _that_ disastrous: a
few double-spends are an inconvenience and not a disaster for Bitcoin. There
is no need to allocate 25btc a block to achieve the current record of close to
zero successful double-spends. It is wasteful.

So as the block reward declines, we'll see more reasonable amounts of revenue
flowing to miners and hence also a decline in how much computing power
(electricity) is spent, eventually converging on what is optimal for securing
the blockchain.

~~~
nhaehnle
So... you'll have miners who have sunk huge investments into powerful
computers who are unhappy to see their investments become worthless, and who
have the computer power to force high transaction fees onto Bitcoin users.
That'll certainly be interesting to watch.

 _Somebody_ is going to lose big time. The question is whether Bitcoin as a
currency will survive in the fallout.

~~~
gwern
The decline in block reward is gradual and predictable enough that your
scenario simply won't happen.

------
rasengan
How to curb speculative demand for Bitcoin in 3 easy steps:

1\. Write paper saying Bitcoin will peak at 1300.00 when the price is nearly
1300.00

2\. Publish

3\. Profit

...

~~~
ekianjo
:) At least for once we don't see an article saying that the BTC value is
worth a big fat zero.

------
cfallin
The bitcoin mining analogy on p. 2 is actually pretty good IMHO -- I've tried
to explain Bitcoin to others before but it always gets a little abstract when
explaining proof-of-work.

------
cjaredrun
sounds like somebody bought some bitcoins!

It is more than common for banks to invest and hype markets (ie. chase
artificially pumping the Facebook IPO). They can because of their sheer size,
so why not?

~~~
zodiac
Their sheer size also represents two reasons against their investing
significantly in bitcoin: one, any buying or selling on their part will
significantly move the price of BTC because the markets are so thin, and two,
there are regulations that force them to control risks, and I'm not sure what,
if anything, such regulations have to say about buying cryptocurrencies.

~~~
crdoconnor
>there are regulations that force them to control risks

The fine is usually low enough that they treat it as a cost of doing business.

------
dgregd
These all Bitcoin PR actions are quite similar to situation on gold market few
years ago. And we know what happened with gold prices.

US is exporting "green paper" and importing physical goods. Do you really
believe that the US government and banksters will opt out of all fiat currency
benefits?

It is interesting that China government is honest enough to tell the people
what Bitcoin really is.

~~~
nly
> And we know what happened with gold prices.

Still 3 times what they were 10 years ago. It seems unlikely at this point
Bitcoin will collapse back to the $10 it was a year ago, even if there's a
massive crash. For whatever reason, this year was a turning point.

~~~
aestra
>For whatever reason, this year was a turning point.

There's a few reasons for that.

    
    
        The banking crisis in Cypress 
    
        The opening of BTCChina
    
        The US Senate hearing on Bitcoin
    

The explosion of price caused by the above caused it to be in the press, which
acted as a positive feedback loop and caused further explosion of the price.

------
netrus
Most interesting for me: They estimate the fair long-term value to be around
1.300 USD - indicating no more great rises will come.

~~~
1qaz2wsx3edc
Well, I have a feeling it will go higher. I've only been paying attention
recently, but as I understand it, 30-40% of generated coins have been inactive
since 2009-2010. If the market cap is 15bn, then we can assume 11538461.538
coins exist, but if say 8076923.076 coins (70%) then the value of a coin is
1857.14USD or the market cap is closer to 10b.

Which is it?

~~~
rebelidealist
If most of merchants on the internet are willing to accept bitcoins, then a
bitcoin can be worth 100x more than $1,300. It is a value of a finite resource
like the value of a diamond.

~~~
ekianjo
Yeah, if Steam or even, let's dream a second, Amazon ever accepts Bitcoins,
this will make the utility of Bitcoin explode, and its value should go up as a
direct result.

~~~
sgk284
If Amazon ever accepts bitcoin, you're effectively allowing Amazon to track
all of your non-Amazon bitcoin spending too (via the public ledger) since
they'll know your address and/or name. You'd have to go through a third party
to obfuscate the bitcoin's source wallet, which I suspect most people won't do
(if mass adoption of bitcoin occurs).

The moment a physical address / name are associated with a wallet, any
spending from that wallet can be tracked back to you forever. If a substantial
number of people are using bitcoin on Amazon, then effectively Amazon will be
able to track what and where all of those people are spending their money.

Multiply this across all retailers, paycheck services, government institutions
(e.g. the IRS), etc... and bitcoin effectively allows many corporations and
governments to track any of your spending and (perhaps more importantly)
wealth associated with bitcoin. This, I suspect, will ultimately limit
bitcoin's adoption.

~~~
ekianjo
Who says you are limited to having a single wallet anyway ? As far as I know
nothing prevents you from having 10 of them. It's not different from having
separate credit cards, which is something people already do nowadays.

As for the tracking of your spending, it's already happening when you have a
credit card. I don't know if Amazon know about your spending outside of their
marketplace, but Mastercard, Visa and others certainly do, and I'm not sure
whether they keep that data entirely private or not - Nothing would stop the
government to ask them directly for your data, for example.

~~~
sgk284
For sure, you could have multiple wallets. My point is, the second you spend
from one wallet, that wallet may be forever "tainted".

Admittedly, governments can already request credit card data, under court
supervision (ideally... unfortunately, it seems with an exception for the
NSA), but with bitcoin you are voluntarily placing this information on public
record.

If you ever want to buy something with bitcoin, the retailer can immediately
look up how much money you're worth (or at least that particular wallet) when
you give them your wallet address. They can also immediately check if you've
spent any money (and how much) with their competitors' known public wallets.

There will likely be aggregation services that will associate multiple wallets
that are connected with a common address (just like modern day data collection
agencies) and sell this data to retailers. Advertisers will know exactly (or
at least a lower bound) of how much you're worth and where you like to spend
your money.

If bitcoin gets traction, it will effectively ruin any financial privacy we
have remaining. It's one thing for a government to have access to this, it's a
whole other world of problems when _everyone_ from my neighbor to my cable
company has access to it.

~~~
icebraining
_My point is, the second you spend from one wallet, that wallet may be forever
"tainted"._

A wallet usually had multiple addresses, and there's no reliable way to tell
if two addresses are from the same person or not. So if you have funds on your
public address A, and you transfer some to new address B, and later you pay
with B, there's no reliable for Amazon to tell if A belongs to you or not.

 _They can also immediately check if you 've spent any money (and how much)
with their competitors' known public wallets._

That's not how it works. Companies can't just tell people to send money to
their public addresses, because it'd be very hard to tell payments apart. They
generate random addresses for each client, which they then transfer back to
their main addresses.

But since most sites use payment processors like Coinbase, what really happens
is that the processor generates _their_ address, which the user send money to,
and then they use internal accounting to send a single transfer to the
retailer.

So all Amazon would know is that you spent your money with someone who uses
Coinbase, but only Coinbase would know who.

~~~
Aauubugruburgle
My knowledge of the blockchain is quite limited but wouldn't seeing who sent
the equivalent amount (plus/minus transaction fee by processor) to the
processor that subsequently goes to amazon be quite trivial? That leaves you
with the original wallet, and although it is not hard proof that all wallets
are yours, wouldn't transferring between your wallets be visible too, tainting
all wallets over time?

~~~
icebraining
Let me try to unpack the problems. sgk284 described two situations:

\- One is that Amazon can identify your wallet when you pay them for
something.

My objection is that if you have multiple addresses, it's not easy at all for
Amazon to know if they all belong to you or not. Of course, it doesn't work if
you just create an address, transfer the payment amount to it, and then
immediately transfer it to Amazon.

But if you keep a savings address and few payments wallets and maybe a web
wallet (which is not really a "wallet", since it mixes your bitcoins with
everyone else's), it becomes increasingly hard to tell apart.

\- The second problem is that Amazon, having identified your wallet, can then
see what _other_ retailers have you bought from.

But this doesn't work, because other retailers will use payment processors,
and that kind of tracking (correlating in → out) doesn't work, because payment
processors don't do that. Instead, they pool all the payments and send you
(the retailer) a single transfer at the end of the day/week/etc.

------
k__
I read about having multiple adresses for payments.

Does this mean I have to create a new wallet for every transaction I'm doing?

Wouldn't lead to end up with a hundret wallets after a few years?

~~~
salient
You can use just one. Some like to play it safe, though, and keep an "active
wallet", where they have a small portion of their money (especially if they
have a lot of Bitcoins), and they keep the rest backed-up (and encrypted) and
somewhere safe, locally, to protect themselves against hacks.

~~~
k__
Is the wallet just a local concept?

The understanding I got after reading those guides online is like this:

the addresses are public keys

the blockchain knows how much money every address owns

the wallet holds the public and privat keys

is this right?

~~~
javert
Precisely.

Although a public keys can be re-created from the private key, so the wallet
doesn't have to store that.

And the address is actually a hash of the public key, to make it shorter and
more readable.

------
mcculley
These recent analyses, even if correct, attempt only to compare bitcoin to
currencies or commodities. They are not addressing the potential of new
functionality enabled by features of bitcoin such as multisignature
transactions and the nascent payment protocol. They don't address the network
affects either. Bitcoin only has to get a toehold on a class of transactions
and will then start to become more valuable.

------
tobias2014
What is the source? How can we make sure that this is not a hoax to manipulate
bitcoin rate? The analysis seems quite superficial.

~~~
brokentone
I heard from a friend at BofA it's legit. So, there is that...

------
kyleblarson
The only piece of information that I take away from this is that BofAML has
likely already entered a large short position in BC.

------
phyalow
I think the sheer fact that this exists, BTC is on BBG and regularly mentioned
in FT etc means the only way is up.

~~~
davidw
Do you foresee a permanent plateau at some point, or just up and up?

~~~
peteretep
When I can get a government-recognized financial product - 401k, ISA, current
account, whatever - that is linked to BTC, in most major developed countries,
insured against theft, the market-distorting factors should be gone.

------
atmosx
Interesting reading, coming from BoA, but _nothing really new_ there, except
from a rough estimation that BTC's intrinsic value is/will-be ~ 1300 USD,
which could be way off the mark.

So nothing new anyway.

------
ryguytilidie
This feels like just maybe a slight bit of a conflict of interest...

------
FeeTinesAMady
tpeng: you're hellbanned. You'll have to create a new account.

------
james1071
The analysis is a joke.

~~~
onebaddude
As opposed to the depth of your comment.

~~~
james1071
Miaow! The analysis is absurd because it treats Bitcoin as the only
representative of an asset class (crypto currency), rather than one of
possibly hundreds.

~~~
simplemath
There are dozens of altcoins now but LTC is the only one with any real cap -
and its purely a speculatve vehicle, whereas while BTC is mostly speculative,
you _can_ actually exchange BTC directly for goods and or services in a
rapidly increasing number of ways.

The ecosystem and brand awareness is novel for BTC, so in that respect I don't
disagree with the analysis having focused solely on it - however, I do find
their number (remarkably close to current price) a bit leading.

~~~
james1071
The analysis assumes a demand for such a currency and assumes that Bitcoin
will have 100% market share.

That is not going to happen.

------
mkramlich
Thought experiment:

Pretend it is 1 year go. Assume at that time that BTC was trading for 50 USD.
(I pulled this out of thin air, somebody can look up the real historical rates
at that time, if curious. But I know it was much much lower than present.)
Pretend that BoA came out back then with a fancy serious official "expert
judgment" report saying that the maximum fair market value of BTC would be 70
USD/BTC. Now let this digest in your mind.

And that this type of thing is happening all the time in the "serious"
financial/business/entrepreneurial world. Nobody's an expert about the future.
(Nor on the present.) It's an unknown country. It doesn't exist yet. I won't
say that literally _anything_ could happen in the future. But there are so
many things that can, and so many variables and moving parts, and so many
unknowns, that it's often effectively equivalent to that.

If a man steps out of a Time Machine from the Future, and tells me the maximum
value is 1300 USD, then, maybe I'll believe him. But I'd still want some
independent verification that his box can truly travel in time. And these BoA
folks aren't even claiming they have that.

------
goggles99
Interesting, but how do we know it is genuine (not counterfeit)? Where is the
press release from BofA?

~~~
phyalow
It's from a FICC research team - you don't issue a press release (albeit this
is initiating coverage).

------
waqasx
And now we see banks buying into the latest Ponzi Scheme. When the BTC bubble
bursts, now it wil take banks down with it. I guess they'll never learn.

~~~
TomGullen
Wrong. The only thing worse than losing money in a bubble from a banks point
of view is missing out on a rare explosive paradigm shift. It makes perfect
strategic sense for banks to invest in Bitcoin.

~~~
waqasx
yeah, downvote the messenger.

