Is it too late to buy bitcoin?
I’ve seen so many people ask this question given the huge price surge lately, so here are my thoughts. Short answer: No, it is not too late. If the target value for bitcoin is $100k to $1M, does it really matter whether you bought bitcoin at $100 or $600? If you’ve just stumbled across this site, you should also see my earlier post: How to buy bitcoin in Australia.
The expected value case for buying bitcoin
Let’s examine the case in favour of buying bitcoin. Here’s how I see it:
- Think about what the target value for bitcoin could be
- Assign a likelihood of that target value eventuating
- Then decide how much you are willing to bet on bitcoin. Try and pick an amount of money that you would be emotionally/mentally willing to lose as a bet, whether this is $100 or $1,000.
I’m obviously not recommending that people go and throw their life savings in bitcoin, but I do think a small bet is worthwhile and in my opinion, has a positive expected value. Remember, each bitcoin is divisible into 100 million so you don’t even have to buy a whole bitcoin – you could just as easily buy 0.25 bitcoins and this would still make sense if you think bitcoins have a 10% chance of someday being $1M each i.e. you could then exchange for $250k, which gives you an expected value of $25k.
In no particular order, here are some resources that you might want to consider:
- The Target Value For Bitcoin Is Not Some $50 or $100. It Is $100,000 to $1,000,000 by Rick Falkvinge. Based on the markets that bitcoin may enter/disrupt which include: illegal trade, international trade, merchant trade, investment and based on a 1 to 10% market share of global GDP (approximately $60 trillion USD), we get target values in the range of $100k to $1M per bitcoin.
- This analysis by The Global Macro Investor via zerohedge: “Let’s use a broad guesstimate. One Bitcoin should theoretically be worth 700 ounces of gold or pretty close to $1,000,000, if we adjust existing supply of both to equal eachother. One BTC is currently worth 0.14 ounces of gold. That gives BTC an upside of 5000 times to equal the current price of gold, supply adjusted. Clearly, I and everyone else believes that Gold may well be much higher than here in the next 5 to 10 years, thus versus the US Dollar the upside for BTC could be multiples of that.”
- Bitcoin 101 Blackboard – Why Bitcoin’s Growth is Normal & The S-Curves You Could Never See – Amazing youtube video drawing parallels with the S-curve adoption that we saw for Facebook, Twitter, or even the growth rate of rats on an island or bacteria. Viewed at a micro level, yes the price of bitcoin may at times be overbought or oversold, however from a zoomed-out S-Curve user adoption perspective, the overall growth trend is likely to be up. Not only this, but bitcoin may eventually hit a ‘vertical’ stage where it grows extremely rapidly.
- Run To Gold Bitcoin price page by Trace Mayer – Some of the figures are slightly outdated, however it gives you a rough idea of the potential markets that bitcoin could eventually come to compete with e.g. the $9T global market for gold, or the $30T stored in tax havens by the super rich.
- The international remittance market in 2014 is estimated to be $593B according to this article. Just for perspective, the current bitcoin market is around $6B.
- Hyper-monetization reloaded: Another round of bubble talk by Konrad Graf. He makes a great point that even if bitcoin were in a temporary price bubble – there is also a sense in which bitcoin becomes more valuable as a form of money because of stronger monetary network effects. One factor in exchange value of bitcoins is each holder’s expectation of being able to use them in future exchanges. Spelt out this means: If I know that other people will buy/accept/use bitcoin, this makes me more likely to use/accept bitcoin myself.
- The ability to store money without it being confiscated by a third party or the government will prove to be valuable in the coming years. We’ve already seen the willingness of governments to “bail in” depositors in Cyprus, or the willingness of governments to confiscate private citizen’s gold as the US government did. And let’s not forget that fiat money is continually being debased by governments of the world – so don’t view your AUD/USD/other fiat money as entirely ‘safe’ now, you are in fact slowly losing purchasing power over time with that too. Sometimes, status quo bias makes us forget about the risks that we are already facing.
Also, realise that attempting to work out all the possible future uses for bitcoin now is kind of like sitting in 1994 and trying to imagine the future impact the internet would have on the world. It’s next to impossible, because there will most likely be ways of using bitcoin that we can’t even imagine yet. Who could have imagined that today in 2013 so many of us would use the internet for shopping, for accessing the sum total of human knowledge on our smartphones, for talking to strangers, for connecting with our friends on social media? But let’s have a guess anyway:
- Imagine the world of international commerce that could be unlocked if the 2.5 billion ‘unbanked’ people of the world had access to an easily trade-able, international, digital currency? The vast majority of economists agree that free trade is beneficial so surely unlocking freer use of labour across the world would also be beneficial. No more silly embargoes, tariffs, local ownership laws and other pointless regulation. If you want to pay a web developer in Zimbabwe with bitcoin, nobody is going to stop you.
- Bitcoin has the potential to be used as a globally distributed asset ledger, ‘marking’ certain coins (this feature is known as “coloured coins”) as being a record of ownership of various assets such as stocks.
- Or imagine what the possibilities would be when global markets are truly freed up and made accessible to one another? We might see new businesses and international trade springing up that were not previously possible. One example of this is bitcoin poker sites, where bitcoin is used as the currency to gamble in – so as to avoid any currency / capital controls with depositing and withdrawing money.
- Or how about the possibilities of using bitcoin as programmable money to automate things? e.g. Your ‘smart fridge’ might have a bitcoin balance that it uses to automatically purchase groceries with. These sorts of things aren’t as easily conceivable now because there isn’t really a programmable protocol like bitcoin that can be used to store balances, and quickly/easily set up bank accounts. In the same way that internet protocols like HTTP exist for use by everybody, bitcoin will likely also function as a protocol that anybody can build services on top of.
It’s not a sure thing
A non-exhaustive list of the possible ways in which bitcoin may fail:
- There may be some massive undiscovered vulnerability in the bitcoin code or the cryptography that cannot be quickly solved. There could be a fundamental flaw that is not yet discovered in the way the economics behind bitcoin works e.g. mining guilds, or centralisation of power within bitcoin.
- There may be difficulties encountered in scaling bitcoin up to support the necessary high transaction volumes. For discussion on this, see the Bitcoin scalability wiki.
- A competitor cryptocurrency may arise that is significantly better than bitcoin, and something about the way this new digital currency works precludes bitcoin from also taking on that feature. Think of the parallel where Facebook can just see competitor ideas that do well, and implement them on their own platform e.g. the hashtag feature was more or less copied from Twitter. If the feature can be copied, then it may simply be included in bitcoin via a patch from the developers.
- The government may somehow be successful at stopping people from using bitcoin (though this is unlikely). It’s more likely that the government could slow adoption but not completely kill it. Still, this may be enough to remove the profitability of your investment.
- Some other form of subversion or manipulation e.g. buying and selling large volumes specifically to cause huge price swings or undermining bitcoin with smear campaigns etc.
What’s been happening lately in the bitcoin space
So obviously the big news lately has been that Bitcoin is becoming very popular in China as a way to invest, and also as a way to evade government currency controls. As I write this, the price of bitcoin has surged extremely quickly over the last few weeks/months from the mid $100s, all the way up to touching $600 USD/bitcoin earlier today. There’s no way to know for sure whether this is the top – for all we know bitcoin may surge to $2,000 and then ‘crash’ to $1,000. Or it could crash and become entirely worthless tonight! Ultimately, if you’re going to buy bitcoin, I think you should be in it for the mid to long term. This means you must be willing to bear the swings and emotionally capable of not panic-selling when your bitcoins suddenly halve in value – for a shot at the long term target value of bitcoin (whatever you feel the long term target value is). You may have to wait for some time ‘in the red’, such as people who bought in the 2013 March/April run up to $266, with the subsequent crash as low as $50. However, the currency did come back from this and those people who sold for a loss only crystallised their losses – while those who held their bitcoins are now making a solid profit. My guess is that bitcoin will go through various hype/media cycles up, and then ‘crashing down’ – but to a higher price floor each time.
See Bloomberg: US Agencies to say Bitcoins Offer Legitimate Benefits. Later today, the US government Senate hearings on bitcoin will take place, and it is expected that the government response will be neutral to good – in which case we will likely see even more crazy price surging. If the government response is negative, then we’re probably going to see bitcoin crash back down. But even if the US government response is negative, this really only means that bitcoin businesses will be driven to other countries with a more favourable business environment.
This world is increasingly becoming digital, and it’s about time our money moved that way too.