Innovations & Inspirations

Bitcoins are to money what email is to communication.

Today, there are about 12,000,000 bitcoins—the unit of currency for the open source peer-to-peer electronic money and payment network created in 2008—in circulation.  At $1,000/bitcoin on Coinbase or BitMe, that represents about $12 billion in value. Though tremendous at first glance, as a point of comparison, the total value of all gold reserves in the world is about $7 trillion. Bitcoins therefore really amount to but 0.2 percent of the value of gold, historically the world’s primary store of value.

In other words, all bitcoins in circulation today are worth less than 1/6 of Bill Gates’s total net worth of $76 billion.  Through either comparison, they could be priced way too cheap.

The best way to think about bitcoin, as my friend Charlie Songhurst describes, is to ignore the urge to conceptualize bitcoin as a “currency replacement” or “money.”  It really is the next generation of currency used within a digital ledger.  Within this ledger, or virtual sandbox, the store of value is bitcoin; outside of this sandbox, the store of value can be converted back to whatever you want: USD, Euros, RMB, maybe even gold.  But, within the theoretically seamless, borderless sandbox, there will be a huge reduction of transaction friction, especially across country lines: lower transaction fees– and subsequent enablement of micropayments, lower currency exchange fees, faster transaction times, and even greater trust in the bitcoin unit (particularly for developing markets, where there may be hyperinflation in Zimbabwe or an artificial currency peg in China).  On top of this, bitcoins are a deflationary currency: as the demand rises, the price should rise, as there will only ever be a fixed amount in circulation (21,000,000 after all the bitcoin mining).

Why Bitcoins aren’t Tulips

The graphs of the meteoric rise in bitcoin price look eerily similar to the 1600’s Dutch tulip bubble…just without the crash (at least, so far).  However, I posit that bitcoins differ from tulips for two very simple reasons:

• Tulips’ primary function is to look pretty.
• Bitcoins have hundreds of functions, from online gambling, money laundering, and other illicit activities to seamless cross-border transactions, international micropayments, and more.  Even Shopify’s 75,000 merchants can now accept bitcoin payments, bitcoin ATMs are sprouting, and trips aboard the Virgin Galactic are being booked using bitcoin.

In a bull case, bitcoin could be the way we transact in the near future.  In the base case, it is a hedge against inflation, quantitative easing, and rogue monetary policy.  If you only believe the latter, and the total value of bitcoin could represent only 1 percent of gold, then that itself is worth north of $5,000/bitcoin (>$7,000 according to the table below from the Bitcoin Investment Trust, which was based on a higher gold to dollar exchange rate).  If you believe it has a chance at the former, the sky is the limit.

So, is bitcoin a steal at $1,000/piece?  Very possible.

UPDATE (12/1/13):  Ever since I published the article, people have asked me whether they should buy BTC.  My advice: don’t invest any more than you can afford to lose.  There is a significant probability (i.e. the bear case) that bitcoin will unravel as a ponzi scheme and be worth zero.  Here is a great article on that.  I personally think it will be worth either zero or thousands of dollars more than it is today.  On that risk/reward basis, it may make sense to put 1% or less of your net worth in it, but no more.

Disclaimer: I own some, but not nearly enough, bitcoin.