Bitcoin: Bubble or Value?

Source: Bitcoin Wiki.

Investing in bitcoin is getting easier for those who have little understanding of its basics. And that's been fantastic for speculators, as such demand has driven up the price, which fuels more interest, demand, and even higher prices.

The question is: Does bitcoin really have a sustainable future?

The bullish case
SecondMarket, known for its role in trading private company stock and coloring the value of non-public companies, launched the Bitcoin Investment Trust in late September. The trust allows accredited investors to invest a minimum of $25,000 in bitcoin like they would a commodity. Though, as Felix Salmon explains, the fund comes with extra fees that could take away plenty of the potential upside. With its launch, SecondMarket also published a hopeful slide deck with the following table:

If Bitcoin Equals the Value of... Basis for Comparison Current Value Implied Value Per Bitcoin
Western Union¬† (NYSE: WU  ) Money movement and transmittance platform $11.5 billion $966
PayPal Leading online payment network $22.8 billion $1,916
Monetary base of Turkey Emerging market currency $95 billion $7,983
5% of gold Primary global store of value $450 billion $37,815

Source: SecondMarket.

At bitcoin's current price, lately hovering around $300 from just $150 in October, the fund has performed extremely well with a net asset value per share of rising from $12 at its inception to $31 today.

The bear case
On the end of bitcoin skeptics, Western Union had its own presentation (link opens PDF) outlining the current issues of the digital currency. The company highlighted bitcoin's lack of liquidity and adoption, the immature consumer interfaces, and the regulatory issues that need to be addressed before it would be ready as a form of international money transfer.

However, Western Union has to bolster its case to stick around. New competition has forced Western Union to lower prices, and as a result, the operating margin for its consumer-to-consumer business, which makes up 80% of its revenues, fell to 19% from 25% for the latest quarter compared to a year prior. And Western Union is "keeping an eye on further developments" with bitcoin and other digital currencies.

The bull versus the bear
With each uptick in price, interest in bitcoin increases, and interest in keeping it around increases. There is plenty of financial interest backing its success, and for payment processors like Western Union, the opportunity to disrupt the current hegemony of credit card processors and banks might be more tantalizing of a prospect than fighting bitcoin's proliferation.

Bitcoin fills a niche of digital and frictionless exchange of value. While online purchases require the regular credit card authentication requirements of a billing address, bitcoin can be used as easily as handing over cash. There is value in this.

However, regulation is the largest question mark. State governments take in 22% of their revenue from sales taxes, the largest source outside of transfers from the federal government. Protecting this would be in their best interest.

The takeaway
The interest in new currencies will take awhile to die down, especially as they swing in price to their actual value. The unanswered regulatory questions add further complexity to investing in the currency. And there's reasons for established organizations to both trample it and champion it. Bitcoin's future is up in the air, like it's current price.

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Read/Post Comments (10) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 17, 2013, at 12:19 PM, MotleyBurger wrote:

    Bitcoin is not a stock. Bitcoin is not a commodity. In fact, Bitcoin is something completely new. Therefore everyone from the "legacy" financial world attempting to predict its success or failure, will fail miserably. Bitcoin breaks many rules because it is a hybrid of several different things. It is in a new class. Its value increases as it's adoption worldwide increases. When China hopped on board, its value doubled. And despite the naysayers, there was no subsequent crash. American regulation won't amount to a hill of beans because America is not the center of the universe, and this is a viral, worldwide technology. Bitcoin is not a monopoly money trading exchange for idiots. If that's all it were, all Bear predictions would've come true already. For those who bother to educate themselves, Bitcoin has immense intrinsic value on several fronts in the financial world. It's the lack of education that creates any Bears that currently exist.

  • Report this Comment On November 17, 2013, at 12:34 PM, Blackhawk wrote:

    Very interested in the latter part of your post. ;all Bear predictions would've come true already. For those who bother.............................................etc.

    Please expand on your thoughts/allegiance to this stock.........................As an old Fool I am not seeing the original MF philosophy and so, going for a kill.


  • Report this Comment On November 17, 2013, at 4:52 PM, ADB wrote:

    It may be very worth your while educating yourself on bitcoin. http changed publishing. mp3 changed music. Bitcoin could shake up Finance.

    Just think how much the music industry had been turned on its head by mp3. True there will be a huge swathe of people who cant understand or not trust it. Thing's are moving very fast.

    As previous poster said, China is now onboard. Real Estate Transactions in China are now being made in Bitcoin. It's very early days but to not have a small part in an adventurous portfolio would be fool-ish.

  • Report this Comment On November 17, 2013, at 4:57 PM, ADB wrote:

    Have a read of this. Yes there's hundred of articles out there on bitcoin.

    This guy people take notice of (his twitter followers testify that, FT, Paul Mason, Rob Peston etc).

    Does it make you sit up and think or you still bearish?

  • Report this Comment On November 18, 2013, at 12:42 AM, Hefslaugh wrote:

    So a nonexistent currency that exists only in cyberspace will go up in price to the moon because it is based on complex math that no one really understands? I understand the dollar is really based on nothing (the faith and hope in the U.S. government). I guess this is the world we now live in: fake economy, manipulated money and markets, utter rejection of reality. This is real evidence of why we need a currency based on something of actual, tangible value.

  • Report this Comment On November 18, 2013, at 7:39 AM, ADB wrote:

    @ Herslaugh.

    Many people do not understand MP3 or how a computer actually works (hence popularity in touch devices like ipads which dump down the complexities so the average consumer (and 6 year old) can use with ease.

    If you do not understand bitcoin but people who have made multi millions in IT (Winklevoss brothers) invest millions in it, perhaps you should be educating yourself on understanding it?

  • Report this Comment On November 19, 2013, at 8:41 AM, VikingBear wrote:

    Are any casinos accepting bitcoin for chips?

    Maybe they know something...

  • Report this Comment On November 19, 2013, at 5:09 PM, frank10011 wrote:

    [ So a nonexistent currency that exists only in cyberspace will go up in price to the moon because it is based on complex math that no one really understands?]

    Bitcoin does not employ complex math. As a matter of fact, the mathematically principles that underpin it are fairly simple.

    Put differently: These days, to obtain fresh Bitcoin one needs to perform simple math over and over again. This takes a lot of time and energy, which is why the process (i.e. mining) is described as "hard".

  • Report this Comment On November 20, 2013, at 12:18 AM, Castlenm1 wrote:

    Are there any publicly traded stocks the one could invest in for indirect exposure to the bitcoin market, without having to actually purchase bitcoins? Perhaps one that makes mining processors.

  • Report this Comment On November 22, 2013, at 8:38 PM, TimSchiffer wrote:

    Of course Bitcoins are a bubble I would even go further according to it is even a ponzi scheme... Don't touch it!

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