

Time to take the Bitcoin bubble seriously - ekpyrotic
http://www.ft.com/cms/s/0/4ad1bba0-61fa-11e3-aa02-00144feabdc0.html?siteedition=uk#axzz2n5jNJOeW

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chalst
Full text - I generally don't condone pulling stuff through paywalls, but the
FT's policy is particularly daft and suppresses just the discussion their
"readable when reached from a search engine" policy is supposed to promote.

    
    
      Time to take the Bitcoin bubble seriously
    
      By John Authers
    

The moment has come to take Bitcoin seriously. This month has seen notes on
the online currency from mainstream foreign exchange analysts at Wall Street
banks Citi and BofA Merrill Lynch. When Wall Street has to take Bitcoin
seriously, the online currency has arrived.

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
    

Therefore its value rests on perception – what people think it is worth. The
same is true of gold. But millennia of history demonstrate that humans
perceive some intrinsic value in a shiny metal. Bitcoins have only been around
since 2009.

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
    

There is a further problem. Bitcoin, as Citi’s Stephen Englander points out,
is replicable. The genius of the new currency is that it has built-in
scarcity. But if the concept catches on as a means of payment, then demand
will increase, and that scarcity will get in the way of its ability to
function as a means of payment.

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.

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agumonkey
I like this idea of first-mover to market not being a real force nowadays,
fluidity let the structural value of a system emerge by ~itself.

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taylan
Money quote:

 _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._

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islon
You have to pay to access the article. Why even bother posting it?

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DanWaterworth
You don't have to pay, but you do have to register. The conclusion is the
same.

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thomaslutz
Thanks for the full text, but I will flag this paywalled link anyway.

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llort
use this to go in without registering or paying
[http://bit.ly/IPaspb](http://bit.ly/IPaspb) (via google)

