Bitcoin - Business Aspects

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Bitcoin Business and Economics

Bitcoin as a legitmate investment vehicle

Kurt Eichenwald:


"Put simply, despite all the hullaballoo, Bitcoins are not a currency, at least in any traditional sense of the word. Rather, they have transformed more into an investment, like a stock. I could certainly purchase items with shares of Google Inc.—I would just have to find a seller willing to accept them—but no one would rationally say that makes stock into a currency rather than an investment.

The essence of a currency is a rational expectation of relatively stable valuation. Yes, values can collapse or soar, but those circumstances relate to unusual events and, for the most part, are widely predictable ahead of time. Outside of those circumstances, the values of valid currencies tend to fluctuate within a reasonable range. There are several reasons for this, including the existence of central banks, which can act to preserve the integrity of their national currency. But more important is the rich and liquid markets for nationally backed currencies, with traders buying and selling based on floating exchange rates. When one currency—say the yen—rises in value against the dollar, a trader might sell it for a profit, then purchase the now cheaper dollar. Or, if, say, the dollar were to start collapsing, the Fed could intervene in the market and purchase quantities of the currency to stabilize it. But it is almost incomprehensible to imagine that 100 yen would be worth $1 on Monday and then be worth $5 on Tuesday. That is the kind of daily value change seen in stocks.

Or in Bitcoins. Last year, the value of Bitcoins more than doubled, from $5 to $13. In other words, assuming Subway accepted Bitcoins (Lord help us), you could have purchased one of the restaurant’s $5 foot-long sandwiches with the value of one Bitcoin unit. By the end of the year, you could have purchased a little bit more than two-and-a-half sandwiches, even though the actual price was the same.

This year, the insanity of Bitcoins is obvious for all to see. Within a few months, the value of Bitcoins soared to a high of $147, an eleven-fold increase. Now that poor Subway restaurant will be turning almost 30 sandwiches for the same number of Bitcoins, with the dollar value of the meal not having budged. In other words, the Bitcoin economy is experiencing massive deflation in the value of assets.

What caused this unprecedented jump, which translates into an annualized return of about 4,000 percent? The general consensus is that the financial crisis in Cyprus, which led to proposals to raid domestic bank accounts, set off a panic among Spaniards, who feared that the tumult would cross the Mediterranean and put their savings at risk. So large numbers of them converted their euros into digital Bitcoins.

But the reason for the price jump is almost irrelevant. What matters here is that the experience shows that the Bitcoin is not functioning like a useful currency. Think about it—would you cash in a share of stock at $13 if the price was zooming up? Or would you wait to see how high the value might go? Principles of smart investing dictate that you should sell when you’ve made reasonable profits, before an inevitable turnaround. Few ever follow those rules, including Bitcoin buyers.

Hoarding has become a common feature of the Bitcoin market, as purchasers hold on to the investment in hopes that the prices will keep rising. One comprehensive study released last October found that more than three-quarters of all Bitcoins—78 percent—had been stuffed into virtual mattresses and taken out of circulation. In other words, in a system where supply and demand dictate prices, the available supply in the market is far less than might be imagined.

In essence, the market is a fantasy. Once the hoarders stop buying, what buyers will step up to the plate to take their place? My bet? No one. There will be, at some point, a time when some hoarder decides to unload. Prices will drop. Other hoarders will get scared and start to sell. Prices will drop further. Before long, there will be a mass rush to the exits. And at that point, the illiquidity of the Bitcoin market will be apparent.

A similar thing even happened to the richest, most liquid investment game of all: the United States stock market. In 1987, the market was creaking a little, and prices started to move downward. At that point, there was a popular idea called program trading, which, at its most basic, would result in sales of stocks if prices fell below a particular level. Of course, when the stock fell, the programs started selling—and all the elephants tried to run through the same door at the same time. Stocks lost 22.6 percent of their value in a single day, simply because there were not enough buyers to offset the flood of selling. That’s exactly what will happen when the hoarders of Bitcoins start to cash in.

Perhaps the best document to understand the Bitcoin market is a report published in October by the European Central Bank. In it, the institution spends a good deal of time critiquing what it calls “the bitcoin scheme.” (Warning No. 3: When a major financial player refers to an investment as being part of a “scheme,” steer clear.)

One of the big problems, the bank writes, is that the Bitcoin investors are on a very uneven playing field, largely because of the complexity that seems so cool. Yes, many markets have investors struggling with different levels of information, but those are usually in liquid markets where such variations will not usually leave one side broke. The bank says of Bitcoins:

The system demonstrates a clear case of information asymmetry. It is complex and therefore not easy for all potential users to understand. At the same time, however, users can easily download the application and start using it even if they do not actually know how the system works and which risk they are actually taking. This fact, where there is clear legal uncertainty and lack of close oversight, leads to a high-risk situation. Not enough to convince you? Then perhaps Gavin Andresen, a lead developer on the Bitcoin project, might:

Bitcoin is an experiment. Treat it like you would a promising Internet start up company: Maybe it will change the world, but recognize that investing your money or time in new ideas is always risky. I think Andresen understates the case: Bitcoin is far more dangerous than an Internet start-up company. With a start-up, you can at least see the business plan and assess its probabilities for financial success. Bitcoin is a completely anonymous marketplace. Even assessing how much of the market is held by hoarders requires experts to make analyses.

There are some critics who contend that Bitcoin is a Ponzi scheme, where the initial buyers are simply earning returns with the investments of future buyers. That oversimplified the circumstances—Bitcoin doesn’t actually fit the model of such a scheme.

It does, however, fit the model of one of the most famous investment bubbles in history, the tulip-and-bulb craze. It took place from 1634 to 1637, a few decades after tulips were brought from Turkey to the Dutch. A virus changed the colors of the tulips, making them very popular. Prices began to rise as people bought more and more tulips. Hoarders (the tulip-bulb centers) began loading up on them, driving up the prices as demand increased and supply dropped. Then tulip investors who had huge paper profits decided to lock them in by selling. And the price dropped. Which led to more sales, larger price drops, and on and on. By the time the downward spiral ended, tulips were back to being flowers—not investments—and the bulb investors were wiped out.

In essence, the tulip-bulb bubble was based only on the fact that buyers and sellers decided—peer to peer—that these flowers had ridiculous values. It was nothing more than an agreement in thought. Bitcoin fans admit that the currency has value only because the users in the Bitcoin market think it does but say that that is no different than in the markets for dollars, yen, and other national currencies. And that is absurd. There is no country, no national bank, nothing standing behind the Bitcoin valuations other than other Bitcoin investors. If the dollar falls, the Fed will jump in. And if the Bitcoin falls? Well, personal bankruptcies will probably go up.

So, anyone out there buying Bitcoins at ridiculously inflated prices, please recognize the risk you are taking. You will likely lose everything." (


"Bitcoins are not an investment. They are an investment fad that someday could be a real digital currency, but if they continue to behave as they have, they will instead be nothing. This is not hard to understand. The fact is that real investments—outside of manias—do not quadruple or sextuple, much less gain 20 times their value so quickly.

Add to that the reality that Bitcoins have no true method of underlying valuation. You want to buy a stock? Pull up its filings with the S.E.C. and assess its financial structure and business strategy. A municipal bond? Same thing. A national currency? Assess the present economic conditions of the issuing country and check relative interest rates, etc., to determine which currency is the most valuable at that time.

Assess Bitcoins? All you can do is examine the trading patterns, which do not provide a real analysis of any underlying economic value. The economics of investments are not solely based on supply and demand, and that is all that goes into Bitcoin prices. It doesn’t matter if the demand comes from a currency panic in Spain—which is one of the rationales being offered for the jump—or rank speculation. There is nothing backing up the values—not a government, not an underlying financial value, nothing.

Then throw one more bit of news on the pile. Mt. Gox, the major Bitcoin trading platform, today announced it was halting trading because of what it called a panic. Halting trading? I don’t recall Mt. Gox halting trading when the stock was zooming up at irrational speed. I don’t recall it declaring that ridiculous growth as a mania, although it’s fine calling the collapse a panic. If trading in a financial instrument can be shut down without notice on a decline—but is kept open when it is going up—that instrument is being subjected to a rules-based manipulation. And given the amount of hoarding involved in Bitcoins—78 percent of the market is being hoarded, according to an academic study published last month—the probability of a pure manipulation of the price by big holders after everyone “cools off” is too high for comfort. (By the way—news for the big holders: if anyone does try to manipulate Bitcoin prices when trading begins, they will probably go to jail. It might not classify as securities fraud—after all, Bitcoins are not a security—but it certainly would be wire fraud.)

Here’s the bottom line. Bitcoins are not a real investment; they are bets inside a casino. If the price goes back up, don’t be fooled. In the parlance of popping investment bubbles, it’s something called a “dead-cat bounce.” People who are desperate to keep the game going rush back in, hoping to bring the price back up, but it never lasts.

As I said, maybe someday Bitcoins will be a real currency. But if you think they are a great investment worth a huge chunk of your savings, check Google maps for your nearest bankruptcy court. You’ll be there soon." (

See also: Quantitative Analysis of the Full Bitcoin Transaction Graph

Bitcoin's Business Uptake, 2013

Jessica Roy:

"Its recent buzz in the press has also helped bitcoin shed its black-hat shackles, as respectable businesses, including many popular websites like WordPress, OKCupid and Reddit, have begun accepting it as a form of payment. Offline, there is a surprising variety of items available for purchase with bitcoin: everything from houses to Domino’s pizzas. The hotel chain Howard Johnson will rent you a room in exchange for bitcoin. A Class Limousine, a black car service in New York, has started taking bitcoin payments. A few weeks ago, a Brooklyn man put his Mercedes up for sale on Craigslist and was willing to accept bitcoin. “It’s booming!” the salesman told The Observer. “It’s worth the same as money, so who cares?”

In early April, The New York Times reported that Cameron and Tyler Winklevoss, the famous Facebook-claiming twins, own 1 percent of all bitcoin, further compounding the currency’s hype. Around that same time, Andreessen Horowitz, one of Silicon Valley’s most storied venture capital firms, announced its intention to invest in its first bitcoin company, OpenCoin.

On a recent trip to Silicon Valley, Mr. Shrem said that investors were practically falling over themselves to get a piece of the bitcoin pie." (

In conclusion, it can be used for a plethora of purposes: exchanges (, betting (, shopping ( and others. Bitcoins can now be obtained in almost any way imaginable -- they can be purchased from online trading platforms or physical traders/ATMs. Bodog, Bovada and other gambling establishments have not yet utilized it as part of their strategy, regrettably. Many large retailers such as Overstock, TigerDirect and NewEgg have, though. The companies have integrated bitcoin into their payment systems successfully. The number of merchants that accept it is increasing over time, and there is no foreseeable end in the near future.

A number of investors have placed their vote of confidence in the currency; these include the Winklevoss twins mentioned above. If forward-thinking businessmen consider bitcoin as here to stay, then perhaps the currency is in fact being taken more seriously by the world.

What are Bitcoins spent on?: September 2013 calculation

The article from which this is excerpted gives detail on the price fixing schemes used to artificially inflate the bitcoin economy.

Rick Falkvinge:

"we look at the different economies making up bitcoin today. There are about 11.7 million bitcoin in circulation today. Out of these, a staggering 2 million bitcoin are gambled every year on the SatoshiDice site alone, and another, PrimeDice, 1.5 million.

To put these numbers in perspective, if translated to the global economy, it would mean that people bet the entire production of the USA at one single betting site, and the entire production of Europe on another. But as we have seen, these numbers do not contribute to the money supply pool in any meaningful way in a functioning economy. They are not funds in lockdown, or at least not for more than a few minutes. For all intents and purposes, the velocity of internet-based gambling money is infinite, or at least so much larger than other funds that it can be discarded.

That leaves us with drugs, read Silk Road, and for lack of a better word, normal products and services. A recent estimate says that Silk Road has two million USD in monthly turnover. This is real money that contributes to the money supply. A fair estimate could assume a two-month lockdown on such funds.

What about normal products and services? To get a ballpark understanding, I contacted Automattic (the parent company of WordPress) and asked politely if they could share how much revenue they have received in bitcoin, being one of the highest-visibility brands ever to accept bitcoin. The answer came quickly – “a couple of hundred dollars worth, so far”. If the highest-visibility brand accepting bitcoin has had less than two bitcoin in revenue in total, then for all intents and purposes, there is currently no measurable bitcoin economy outside of drugs and gambling.

This gives us enough data to calculate the value of the money pool, and derive the value of one bitcoin from there. If Silk Road has 22 million USD in annual sales, let’s be very generous to err on the safe side, and divide that by the United States’ money velocity, which is 1.67 on average instead of the 6 estimated above.

This generous estimation gives us a total bitcoin money supply value of 13 million USD.

The observant will note that this estimation of bitcoin’s total money supply value, while obviously a ballpark number, is less than two magnitudes smaller than the bitcoin money supply’s current valuation of 142 USD x 11.7M bitcoin = 1.66 billion USD.

Dividing this value with the bitcoin supply to get the current value of one bitcoin, this means that the current value of one bitcoin, as backed by exchange of products and services in its role as a transactional currency, is roughly one US dollar and twelve US cents. And that’s still a generous estimate.

It’s not hard to see why I use the words “vast overvaluation”, seeing how one bitcoin is currently trading at 142 USD. So how did we get here? Part speculation on future value, obviously, but there is something else going on too here. More interestingly, when looking very closely at the market for the past two months, there is ample and obvious evidence of price fixing." (

Bitcoin Speculation as a 'Greater Fool' Pump and Dump scheme

Via Robert Wenzel (excerpted from Forbes)

"[A]ccording to Boston University Finance Professor Mark Williams the price [of Bitcoin] has really been driven by an influential few. Just 47 people own 29% of all outstanding Bitcoins; 930 own 50%. Another 10,000 folks bring the total owned by the largest coin holders to roughly 75%, leaving a sliver to be split among about 1 million small-change Bitcoiners.

Williams, a former trader and bank examiner for the Federal Reserve, argues that in 2013 the 47 powers coordinated to push prices up. They counted on what economists call Greater Fools. Investors make money when someone is willing to pay a higher price for a security than you did — Greater Fool Theory states that there is always someone willing to pay a higher price. But Williams sees the broader market wising up to Bitcoin’s limitations and taking back control in 2014[...]

“If you hype demand the small incremental amount that is available for sale set the price,” says Williams. “That’s not an efficient market, that’s an inflated market, a market that is misled with false information. I think the market mechanism right now is being interfered with.”

As these facts and questions enter the wider consciousness, as they have begun to, Williams feels smaller Bitcoin investors will pull out. “When these million people stop buying at these high prices, that’s when the house of cards will start falling pricewise.” (

Warren Buffet: Bitcoin has no intrinsic value

Alice Truong:

" When it comes to the cryptocurrency, Buffett has these words of advice to investors: "Stay away from it." Calling Bitcoin "a mirage," he took fault not with recent lapses in security that have led to a number of high-profile heists, but with Bitcoin's intrinsic value. It's safe to assume he's not the person behind the anonymous $147 million Bitcoin transaction last fall.

The chairman and CEO of Berkshire Hathaway views Bitcoin as a means of transferring money--not as a currency. "A check is a way of transmitting money too. Are checks worth a lot of money just because they can transmit money?" he asked. "The idea it has some huge intrinsic value is such a joke." (

Bitcoin's Business Potential

USCC Economic Issue Brief, Lauren Gloudeman:

"BAML FX and rates strategist David Woo argues that, as a medium of exchange, Bitcoin has the potential to become a competitive player in the e-commerce market, possibly accounting for 10 percent or more of all e-commerce payments for business-to-customer transactions[1]. Moreover, an increasing number of vendors large and small, including big name brands like and Virgin Galactic, accept the crypto-currency as payment; which is a reflection of the low entry costs to integrating Bitcoin as a payment system [2][3][4][5][6]. Since started accepting Bitcoins on January 9, 2014, Bitcoin users have spent more than $1 million on the website. Patrick Byrne, CEO of, expects the company’s Bitcoin sales to reach up to $15 million by the end of 2014.

Though Bitcoin sales only represent 1 percent of the company’s total sales this year, accepting Bitcoin has successfully attracted new customers, who represent nearly 60 percent of the 4,300 Bitcoin buyers.

Byrne expects that will also eventually start accepting Bitcoin as payment[7], as Bitcoin users will “become too big of a market” to ignore.

Bitcoin’s value as a medium of exchange is also highlighted by its potential to dominate money transfer services like Western Union, MoneyGram, and Euronet. In fact, Bitcoin’s market-driven value, which peaked at nearly $14 billion last year, surpassed the market capitalization of Western Union, at just over $9 billion in November.

As for Bitcoin’s role as a store of value, or as an asset that can be stored and traded at a later time, Woo is less optimistic. Like gold, Bitcoin pays no interest, has a limited supply, and is difficult to trace. Unlike gold, however, Bitcoin’s price is extremely volatile, hindering its viability as a predictable medium of exchange. One J.P. Morgan Securities strategist showed that Bitcoin’s average volatility of 120 percent over the last three years is extreme compared to the typical volatility of emerging markets foreign exchange of about 9 percent over the same period.

Moreover, Bitcoin does not have the reputation as a store of value that gold has maintained throughout history. Because of this disparity, Woo argues that Bitcoin’s worth as a store of value mimics silver more than any other commodity. Bitcoin’s potential is not limited to payments services, but can be applied “anywhere a transaction between two parties has traditionally required third party validation,” according to analysis by Deloitte Consulting LLP.

By utilizing an online public ledger called the “block chain” (see appendix 1) on which all confirmed transactions are recorded, a small fraction of Bitcoin denoting physical property or personal information can serve to transfer “digital signatures, digital contracts, digital keys (to physical locks, or to online lockers), digital ownership of physical assets such as cars and houses, digital stocks and bonds and digital money." USCC.Gov