Dec 6, 2013

On Bitcoin

Bitcoin is here to stay. It seems right; it seems that this new currency "institution" is consistent with the times that we live in...What are your thoughts on Bitcoin? What are your thoughts on the following propositions made by Bank of America regarding the digital currency for the era of e-commerce? Expect more on Bitcoin here...

Tamper-proof, limited supply and divisibility
We believe Bitcoin can become a major means of payment for e-commerce and
may emerge as a serious competitor to traditional money transfer providers. As a
medium of exchange, Bitcoin has clear potential for growth, in our view.

Store of wealth for the underground economy?
It has been reported that Bitcoin may help users avoid high taxes, capital controls,
and confiscation. The correlation between CNY's share of volume of all Bitcoin
exchanges and price of Bitcoin is high and rising (Chart 1). That said, the fact that
all Bitcoin transactions are publically available and that every Bitcoin has a unique
transaction history that cannot be altered may ultimately limit its use in the black

Bitcoin’s role as a store of value can compromise its viability as a medium of
exchange. Its high volatility, a result of speculative activities, is hindering its general
acceptance as a means of payments for on-line commerce.

Fair value?
Is Bitcoin a bubble? Assuming Bitcoin becomes (1) a major player in both ecommerce
and money transfer and (2) a significant store of value with a reputation
close to silver, our fair value analysis implies a maximum market capitalization of
Bitcoin of $15bn (1BTC = 1300 USD). This suggests that the 100 fold increase in
Bitcoin prices this year is at risk of running ahead of its fundamentals.

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