Photo: Bitcoin Wiki.
If I'd once told you intangible coins would be the biggest gainers in 2013, you'd call me nuts.
But as we head toward 2014, Bitcoin has already put up 3,311% returns. In the midst of a bull market in Bitcoin, one headline reads "Why Bitcoin is Going to $1 Million."
A bit of reality
Even after rocketing to $450 per Bitcoin, the total market size is still under $5.5 billion. That's a tiny sum, smaller than the valuation of 969 public companies, and about the amount the government debt grew each day in 2009.
In the past 30 days, average volume at one leading exchange, Bitstamp, has been about $7 million. So it doesn't take much to swing the market.
And that's what has so many people believing that the price of Bitcoin can explode. As I write this, there are only 5,458 Bitcoins standing in the way of a $500 price per bitcoin. That is to say you could move the market more than 10% with a purchase of less than $2.5 million.
What happens if big money gets involved?
A big question among enthusiasts is what happens if conventional asset managers get behind Bitcoin. What if billions of dollars, not millions, were to flood into the market?
It's impossible to know, really. But what we can know is that the price would absolutely have to go higher. Right now, all bitcoins in existence are worth all of $5.2 billion. You couldn't buy $10 billion of Bitcoin at the current price right now. There isn't enough in existence.
The hedge fund industry alone manages $2 trillion. It only takes a few Bitcoin believers of the asset management industry to send Bitcoin to heights it's never before seen.
But at the same time, the opposite can happen. A single sale of 4,800 bitcoins would send prices falling all the way to $400, from $455. That's just the cold, harsh reality of an illiquid market. Relatively small amounts of money can swing values up and down with incredible force.
Bitcoin is the ultimate in speculation. It doesn't produce cash flow. There isn't any real way to value it other than to accept what someone else is willing to pay.
And given that it's a completely new idea, one never tried before, there's no way to know where it all ends. But for many people, it's become a way to dream -- a way to think that one day, maybe, just maybe, that $455 Bitcoin might be something more than pie in the sky.
