Bank of America Pegs Bitcoin -- Here's Why It's a Waste of Timehttp://www.fool.com/investing/general/2013/12/07/bank-of-america-pegs-bitcoin-heres-why-its-a-waste.aspx Jay Jenkins
December 7, 2013
This week, Bank of America (NYSE: BAC) became the first major U.S. financial institution to cover the digital currency Bitcoin. In the report, analyst David Woo estimated a maximum fair value of $1,300 and a maximum market capitalization of $15 billion.
Let's hope this is just a PR stunt, an attempt to make the bank appear younger, hipper, or part of the tech in-crowd. Because for actual investors, this exercise in prognostication is a waste of time. Here's why.
Covering tulips in 1637
Others will tell you that Bitcoin is a flash in the pan asset, not a currency at all. It's a tulip bulb. It's a series of ones and zeroes being traded -- no, speculated upon -- without any underlying value or practical application. There is even a website devoted to maintaining the current Bitcoin-to-tulip bulb exchange rate (690 at the time of this writing, if you're looking to trade your leftover Thanksgiving orange tulips).
At this point in time no one really knows what bitcoin really means in the big picture. It seems equally likely to me that it could be the start of a commerce revolution or yet another time- and money-wasting folly of group psychology.
Bank of America's calculation assumes, preposterously if you ask me, that bitcoins will become "a major player in e-commerce and money transfer, and a significant store of value with a reputation close to silver."
Why is that preposterous, you ask? Several reasons.
1. Pump and dump
Earlier this week the Chinese central government barred the nation's banks from accepting bitcoin. The Bank of France issued warnings as well. Despite these soft actions, the fraudsters still act without fear of repurcussion. From the Times article:
Hard to justify bitcoin as a major player in e-commerce or as anywhere near the store of value of silver when scammers can operate with this much impunity.
2. Its essentially impossible to bet against bitcoin
Traditionally, a short trade requires shares to be borrowed from a current owner. Besides the fact that no mechanism to allow borrowing exists, would you be comfortable letting digital cowboys borrow your money in the Wild West?
Gandel was able to buy put options, derivative contracts that did allow him to bet against a rise in bitcoin value, but the costs involved with executing the trade didn't make economic sense. The trade would have lost money even if the value of a bitcoin plummeted 55%! Hard to justify losing money when a price moves 55% in your favor.
Does this sound like the silver market to you? Me either.
3. The entire bitcoin market is vulnerable to a complete shutdown
But the economics don't matter in that example because of government intervention. Your entire investment could be scooped up by the DEA at any time (and also, there is the whole legality/jail time issue).