Over the past week Bitcoin fully recovered from its weekend flash crash (from a top of $395 down to $290) and seems to be going in the direction of $500. The growth is still way too fast in my opinion, but with my Bicoin holdings I don’t complain of course.
At the moment I spend 1-2 hours per day reading about and analyzing Bitcoin, and based on this I believe that the current spike in prices is mainly coming from China. Why? Because Chinese see Bitcoin as a new asset class. Most Chinese can only invest in the domestic stock market (which is perceived to be full of inside trading) and real estate. They can’t invest outside China. Bitcoin gives them something new to invest in and many are jumping on to this new opportunity without really knowing too much about it and just hoping to make a lot of money. Right now most people do well, but of course a crash may happen when everybody should start selling.
Next to that Bitcoin also gives Chinese a relatively easy way to obtain foreign currency without going through the grey or black market. The Chinese Renminbi is not freely convertible, so you can’t just go to a bank to change them to US dollars. However, you can change RMB to Bitcoins, and these Bitcoins can be changed to US dollars. From personal experience I know this is an important issue, even for some Chinese friends in Vancouver that can’t get their Chinese money out in a legal way (money they legally earned, but that’s stuck in RMB bank accounts).
Because of these speculative effects it’s impossible to predict where the Bitcoin will be 3 to 6 months from now. It all depends on how many Chinese will enter the market. Looking at volumes on Chinese exchanges I believe this is still the beginning of what is to come and part of a self-fulfilling prophecy: the price goes up so more people buy, which causes the price to go up even further. One day there may be a crash and then the real value of Bitcoin becomes more important.
But what is this real value of a Bitcoin and more importantly, how high could it be eventually? With eventually I mean a timespan of 5-10 years, the time that I plan to keep most of my Bitcoin. The value mainly depends on what Bitcoin will be used for. For example, I strongly believe that one of the first things that will happen, is that Bitcoin will take over all the current business of Western Union (money transfers to less developed economies). Why? Western Union charges about 10% in fees! Bitcoin is virtually free and transactions happen instantaneous. Based on the current value of Western Union you can calculate the implied value of Bitcoin, which would be around $880.
I think Bitcoin will be much bigger than just Western Union. What will happen if it takes over the role of Paypal (which is also very likely)? In that case the implied value of Bitcoin would be $1950. And you should add up these figures if you believe that Bitcoin will disrupt both Western Union and Paypal’s business.
It gets really interesting if you start looking at what would happen if Bitcoin would take over just a small share of the gold market. That is, if people would use Bitcoin as a store of value instead of gold. In a way that is what is happening now already in China, although it’s probably not a substitute for gold. In case Bitcoin woul just take over 1% of the role that the gold market has, its implied value would be almost $8000. Of course if it takes over 1% it will likely take over more after a while, so watch that closely if you hold Bitcoins.
Some people are even more bullish than this, for example the Winklevoss brothers. They announced this week that the market cap of Bitcoin could be 100 times the current value. They are among the biggest owners of Bitcoin, so this may be wishful thinking, but the fact that they say this publicly means that they at least have some belief in this.
In the short run a lot can happen to Bitcoin. For sure the volatility will remain extremely high and possibly there will be a big crash because speculators cash out before more people really start to use Bitcoin. But in the long run I believe that Bitcoin has real value. The Bitcoin protocol has so many potential applications that there will be a big ecosystem built on top of the crypto currency. For that reason I remain very bullish on Bitcoin, despite the crazy increase in price over the past days and weeks.
To keep things in perspective, tomorrow I plan to publish an article on this blog about the risks I see for Bitcoin.