Bitcoin is Severely Undervalued

As of today, the entire Bitcoin market is worth $31 million USD. When you consider how many potential applications there are for Bitcoin, that is a shockingly low valuation.

What if, for example, the Team Fortress 2 hat economy was Bitcoin-driven (which it should be, to save people from PayPal and credit card fees). You might find this incredible, but the Team Fortress 2 hat economy, alone, is worth $52.7 million.

If it was purely Bitcoin-driven, Bitcoins would be worth $6.64 a piece. Don't even get me started on pants...

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Bitcoin and Conventional Business do not Mix

It's time to be truly honest about what we're up against in terms of motivating the adoption of Bitcoin.

Imagine the best-case scenario where Bitcoin exchanges accept credit cards, directly. There is absolutely no way they will be able to drop a credit card deposit fee below a very generous 2%, and that's assuming that chargebacks won't happen, which they will.

Add the additional 0.5%, or so, that you would have to pay for actually buying the Bitcoins on the exchange, and you're looking at a minimum of 2.5% in fees from the get-go. That 2.5% already negates any savings that a merchant could offer for someone willing to pay with Bitcoin. Right there, we know it makes absolutely no sense to offer a product or service for Bitcoin when the same thing can already be acquired with credit cards or PayPal. Now you understand why Cheaper-in-Bitcoins made almost no sales whatsoever, and why you'll never see Amazon adopt Bitcoin.

We also talk a lot around here about charities or non-profits that accept Bitcoin donations. Again, no one is going to go out of their way to acquire Bitcoins in order to make a donation; it just adds an unnecessary extra step. Nor are people going to acquire Bitcoins to be able to buy indy-music, make micro-donations to blogs (too bad!), or pay for shareware. Independent artists, writers, and software developers should accept Bitcoin as a secondary source of income, but it will never make up more than a small percentage of their revenue. Bitcoins will eventually trickle into their pockets, but they won't spur the actual adoption of Bitcoin.

So, if conventional online businesses and charities are out the window as motivators for Bitcoin adoption, then what will actually do the trick?

1) Illegal markets. Where there is a desire to maintain as much anonymity as possible, Bitcoin will thrive. Silk Road is what put Bitcoin on the map, and it continues to operate successfully to this day. There is no denying that Bitcoin will become the preferred method of transacting in illegal markets, because it gives an obvious advantage to both clients and merchants.

2) Virtual markets. Virtual currencies could always be purchased with credit cards, but then the user was constrained to one platform. With Bitcoin, users can move their money between different virtual worlds, assuming they eventually support Bitcoin. This is a multi-billion dollar market that can be exploited.

3) International markets. There's never been an easier way to move money across borders. Any business that can take advantage of the agility of Bitcoin will do so.

4) Online gambling. The reason why online gambling and Bitcoin make a great match is because of the ability to easily withdraw Bitcoins from a casino. Until now, it's usually been a pain in the ass to retrieve your winnings. Being able to get your money out of a casino as quickly as you got it in is sufficient motivation to go out to the bank and wire some money to an exchange.

5) Investing. If 1, 2, 3, and 4 begin to catch on, then Bitcoin will continue to be a viable investment for those looking to move their money out of fiat currencies and maybe diversify their precious metal portfolios. Given the ever-worsening sovereign debt crises, Bitcoin will become an even more attractive investment.

Between these five motivators, we're still looking at the possibility of a multi-billion dollar Bitcoin economy. Therefore, at the end of the day, we shouldn't get too worked up about whether or not Amazon or Wikipedia will eventually accept Bitcoin. Bitcoin's strength is not in the conventional.

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Forbes Flops Part II

How does a magazine like Forbes allow such poorly researched articles to be published to their website?

From Tim Worstall:

"Bitcoin isn’t secure as the thefts have shown, it’s not liquid, as the various price crashes have shown when one single large order goes through an exchange, it’s not widely accepted so it’s not all that good as a medium of exchange and as we’re now finding out, it’s not a good store of value either."

For most of you, I'm going to be preaching to the choir, but for the sake of the Bitcoin novice who might take Tim at his word, let's break down this paragraph:

"Bitcoin isn’t secure as the thefts have shown..."

That is analogous to saying, "the dollar isn't secure, as the bank thefts have shown." I'm not going to bother elaborating any further on that one.

"...It’s not liquid, as the various price crashes have shown when one single large order goes through an exchange..."

Bitcoin is the most liquid currency that has ever existed. Any quantity of Bitcoin can be moved instantly around the world, by anyone. You can't do that with cash, you can't even do that with digital representations of cash. You definitely can't do that with gold or silver. Your proof is a non-sequitur.

"...it’s not widely accepted so it’s not all that good as a medium of exchange..."

In 2004 you could have said, "Facebook is not widely used so it's not all that good as a social network." You would have been right... at the time. Was October 18th, 2011 the deadline for Bitcoin? Was that written down somewhere?

"...it’s not a good store of value either."

Neither was Apple stock... in March of 2000.

Regardless, this is not your parents' currency, and doesn't necessarily have to possess the properties of a traditional currency in order to succeed. Bitcoin doesn't have to store value to exist as a medium of exchange. Any ability to do so is merely icing on the cake.

Tim Worstall, your proof of "The End of Bitcoin" is only proof of your lack of foresight and inability to appreciate the most important development that the Internet has seen since email. I'd like to see a follow-up to your article this time next year, but I have a feeling you're not going to want to write about the taste of crow. I hear it's good with mint-sauce.

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Is the Closure of ExchB Driving Bitcoin Prices Lower?

History shows that anytime one of the exchanges goes down, usually due to hacking, the value of a Bitcoin drops significantly. This time around, the site is closing intentionally, but it looks like it may be having the same impact.

I received an email notice from ExchB at precisely the time that the significant drop started, just over an hour ago. The price at the time was $3.72. It is now $3.39. The last time the price was that low was on May 7th!

UPDATE: $3.01. Crazy.

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I Didn't See This Coming

Okay, I will admit, I didn't see this coming, and it's cost me a few dollars.

When you're as much of a Bitcoin advocate as I am, it can be difficult to understand why others don't feel the same way, and when those others put their money where their mouths are, you get the above chart.

FreeTrade nailed it in his "Mappers vs Packers" post. A lot of "Packers" are not seeing Bitcoin's potential, it's raison d'être, and they're bailing because they think Bitcoin's value will drop to something considerably less that what it can be sold for today.

Meanwhile, the Bitcoin economy continues to grow, and difficulty has barely budged relative to the price drop - miners continue to mine.

If you've been reading this blog for a while, you know I'm more concerned with the long-term potential of Bitcoin, but my blog is called "Bitcoin Trader," so I feel obligated to comment on the short-term price changes.

Are we going lower? Maybe, but there just isn't that much lower we can go. At the end of the day, there is a limit on the number of Bitcoins that will ever exist, and so as long as the Bitcoin economy continues growing, which it is, each Bitcoin will increase in value. Is the entire Bitcoin economy and its perceived potential worth less than $21 million USD, or less than $1 per Bitcoin? No chance in hell - no way.

We're talking about a new paradigm for the way money is moved around the world. Is that worth less than a company that makes little plastic shoes? Well, at the moment of this post, all 21 million Bitcoins would apparently be worth 1/22nd of that company. If the ground-breaking, mind-blowing, change-the-world potential of Bitcoin was worth the same as plastic (okay, I'll admit they're pretty comfortable) shoes, all 21 million of them would be worth $108.10 USD each.

I don't know what's going on with this valuation under $4 per Bitcoin. I definitely didn't see this coming, but I will be buying many many more at these prices, and I doubt I'll be the only one.

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Bitcoin's Tipping Point

Let's face it, the last three months have been nothing short of ugly for Bitcoin. Just about the entire Internet has called Bitcoin's time of death, tagged it's toe, and thrown it in the freezer, not even granting it a funeral worthy of pets.com.

Those of us who continue to guard the flame are confused, tired, and starting to ask ourselves if we're crazy. If Bitcoin is so great, why isn't it catching on?

Well, let's look at the facts:

1) Until a week ago, you had to know how to build a computer from scratch to secure your wallet. Okay, maybe that's an exaggeration, but it sure felt that way. At one point I had so many USB sticks and TrueCrypt files on the go, I felt like I could start an on-stage show at the Mirage, juggling flash-drives while singing Celine Dion songs in binary. Once I installed the new client, it took me two hours to undo it all and consolidate my Bitcoins into one secure wallet. Finally, I can tell my friends about Bitcoin, and I don't have to lay awake at night wondering if their Bitcoins are being stolen by crazy hackers from the Caribbean.

2) The Exchanges and E-Wallets are very new and legally ambiguous. There can't be a functioning Bitcoin economy until a solid, time-tested, secure network of exchanges is in place, all around the world. This summer has been absolutely brutal for hacks, stolen coins, and fraudulent website operators. None of this is doing the Bitcoin economy any good. It's going to take time for reliable sites to prove themselves, and for the legal schmozzle to sort itself out, before the average Joe is going to dare dip his big toe in the pool of freedom-coated Bitcoins. Sure, the blackmarket will continue to thrive and grow, but that's not going to help Bitcoin go mainstream.

3) Bitcoin is new, like, Facebook-with-1000 users new. If Bitcoin was a website, it would be on geocities with a bunch of "under-construction" gifs. It's going to take time to build the infrastructure and attract merchants to accept the currency. The last few months have seen a massive drop in Bitcoin value, yet a huge influx of new exchanges and services. Just imagine how many projects are on the go that we don't yet know about, or how many haven't even been thought of yet. Patience is a virtue, and it's desperately needed here.

Within a few years, we'll be looking back at 2011 the same way we look back, today, at the 10,000 BTC pizza, saying, "my God, what were they thinking? How could anyone have written off something that had so much potential?"

The tipping point will come eventually - I'm convinced it's inevitable - but it's not going to happen tomorrow. Anyway, what's the rush? In the meantime, put on your Alpaca socks, smoke some e-cigarettes, and play some bittleships.

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Bitcoin = Mega-Value at $4.80

We don't know how much a Bitcoin will be worth on the exchanges on a day-to-day basis, but there are a few things we do know:

- Every day, more and more websites, e-businesses, and brick-and-mortar businesses accept Bitcoin as a means of payment;
- New software, apps, and services for Bitcoin are launched every week;
- Hundreds, if not thousands of very intelligent and experienced programmers and entrepreneurs are dedicating their time to Bitcoin's development;
- Bitcoin makes possible previously impossible or costly financial transactions.

What do the above mean? Continuous growth of the Bitcoin economy.

What is continuous growth divided by 21 million? A continuously increasing price for a Bitcoin.

The fall from $32 to $4.80 is literally a bump in the road. Makes you wonder how high it can go, doesn't it?

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