An article titled "Why Bitcoin Matters" by Marc Andreesen here at SA shows how he is seeding the new eco-system rising around the Bitcoin crypto digital currency platform. Unfortunately, one thing Mr. Andreesen did not address of major importance is the widely criticized subject of Bitcoin's extreme volatility in valuation. The recent WSJ article titled "Bitcoin's Three Key Challenges in 2014" explains:
"The story is about to change," Nicholas Colas, the chief market strategist at ConvergEx, wrote in a note to clients on Friday. "In thinking through a framework to interpret what will be an eventful 2014 for bitcoin, here are the three points - we'll call them Bitcoin Buckets for a touch of alliterative flair - to guide the discussion." The "buckets," as he called them, are the three key shoals the currency will have to navigate as it expands: regulation, adoption, and volatility."
The volatility and regulation fears are quite nicely summed up by writer Felix Salmon in his numerous Bitcoin posts from Reuters. Here are some excerpts: This specific Salmon post from Reuters is a must read for anyone interested in the Bitcoin subject and we highlight from it below:
I'll say this for bitcoin: it's got a whole new class of people, like Matt Levine and Guan Yang, increasingly interested in one of my longstanding obsessions - payments. .... we're suffering from a particularly toxic combination: an outdated payments system combined with a seemingly powerless central bank, which is happy to let the big banks dictate the pace of change (or lack thereof). And as American Banker's Kevin Wack explained in a great piece last November, the big banks are very good at vetoing even incremental improvements in the US payments infrastructure. ... if you want to understand the massive opportunities here, is the public consultation paper on payments which was put out by the Federal Reserve Banks last September. It's written in reasonably plain English, and makes it clear that the Fed would love to see two key "desired outcomes":
Desired outcome 2: A ubiquitous electronic solution(s) for making retail payments exists that does not require the sender to know the bank account number of the recipient. Confirmation of good funds will be made at the initiation of the payment. The sender and receiver will receive timely notification that the payment has been made. Funds will be debited from the payer and made available in near real time to the payee.
Desired outcome 4: Consumers and businesses have better choice in making convenient, cost-effective, and timely cross-border payments from and to the United States.
In other words, the Fed absolutely understands what Guan and I have been saying for a while. The big problem, however, arises before we even get to the two big "desired outcomes". Indeed, it's so big that the Fed puts it right at the top of the list:
Desired outcome 1: Key improvements for the future state of the payment system have been collectively identified and embraced by payment participants, and material progress has been made in implementing them.
It's this that isn't ever going to happen. As the Fed paper drily notes, the results of its analysis of gaps and opportunities in the payments system "are not surprising as they are comparable to the results of a similar gap analysis conducted in 2002". And the paper itself was released just a month after the big banks which control the existing payments system voted down an attempt to speed it up just a little bit. Probably because they feared that a faster and more efficient payments system would cut into the fees they get from wire transfers, which they charge as much as $50 for despite a cost of only 14 cents.
Mr. Andreesen explains that the Bitcoin revolution is here to stay because it solves the "Byzantine General Problem-The problem is to find an algorithm to ensure that the loyal generals will reach agreement." Mr. Andreesen concludes Bitcoin's algorithmic solution a major breakthrough in technology. We believe Mr. Andreesen's act of putting his and his investors money where his mouth in order is to build companies to exploit the Bitcoin platform certainly should give one a comfort level to overcome some of the recent bad press (irrelevant in our opinion) Bitcoin has garnered. We believe this helps to propel the steady increase in adoption of the platform as a payment alternative such as Sir Richard Branson's Virgin Galactica acceptance of Bitcoin for purchasing tickets on his futuristic space travel service.
In the opposite corner, we have Felix Salmon saying that Bitcoin volatility is what's keeping massive Bitcoin adoption from ramping. We save our comments on this criticism for our conclusion. His next critique is that the Bitcoin solution is so big that it threatens the large money center banks as outlined by a paper sanctioned by the Federal Reserve as referenced above in the Salmon posts. Salmon argues that Bitcoin could potentially solve such huge "payments" issues such as costs, especially as they relate to micro payments. Consequently, Bitcoin hits the big banks, other financial service companies and sovereign central banks themselves in their "honey pots" where they collect extremely profitable fees from transactions. Salmon concludes Bitcoin is too disruptive to let it go forward. Therefore, he predicts Bitcoin will be regulated out of existence. We think the opposite: Bitcoin is so disruptive to the "payments" dilemma of costs and micro payments, that it or a derivative of Bitcoin which may be promoted by a bank such as JPMorgan (NYSE:JPM), will indeed change payments and currencies globally in the near future.
Finally, lets address the volatility issue. In doing so, we must also establish that Bitcoin is not only a crypto currency and payment platform, it is also deemed by some as an asset, and therefore it is subject to price fluctuations. Bitcoin is often likened to gold. We think it may actually be better than gold. Here is why: all the gold discovered to date since the beginning of time is said by Warren Buffet to be able to fit into a cube with an edge length of approximately 21 meters. But all the gold has not been discovered as miners work extremely hard to find more in their mines everyday. Therefore, there is no way to know how much gold there will be in the future. As opposed to gold, the Bitcoin supply is permanently capped at 21 million in the future. In order to draw a parallel to gold, its storied open source software developer who released the first 'client' in 2009, Satoshi Nakamoto, projected how many Bitcoins would be needed to be issued to the developers, builders and supporters of the Bitcoin Platform. These developers, builders and supporters provide the infrastructure and hard work necessary to keep Bitcoin a trusted and robust network. They are referred to as Bitcoin 'miners' because they are the only ones who receive Bitcoins as compensation for their work. Because the supply of Bitcoins stops at 21 million, there is a hard finite supply of Bitcoins forever as opposed to not knowing how much gold there will be in existence. Some rumors say that Satoshi limited the number of Bitcoins to 21 million because it tied to the 21 meter cube edge length referenced above for gold. However, there seems to be real hard evidence to the number in the design parameters as explained in the article, "Satoshi's Genius: Unexpected Ways in which Bitcoin Dodged Some Cryptographic Bullets".
There are approximately 12 million Bitcoins in circulation today. The supply can be tracked here and is expected to increase according to this graph below:
Like any new currency medium or asset for that matter, there are supply and demand imbalances. The volatility in the Salmon graphs above in the fluctuation of Bitcoin prices have to do with user adoption trends and availability of Bitcoins. The 21 million limit is overcome by the ability to divide Bitcoins into slivers down to 8 decimals to adjust for the roughly $900 Bitcoin value today. The smallest fraction currently supported by the system is 8 decimal digits or 0.00000001. This is called a "Satoshi" in honor of Mr. Nakamotos's contribution to Bitcoin. Additional decimal places can be added to subdivide the currency as needed for its continued expansion of the circulation and usage after the total 21 million Bitcoins are issued to miners and go into circulation. Moreover, volatility is what attracts the initial media attention to Bitcoin and will help get the word out and expand its widespread adoption. We predict an announcement that Tesla (NASDAQ:TSLA) will formally accept Bitcoins for purchase of an EV one day, as one dealer in California has already completed a resale of a Model S using Bitcoins. Coincidently, Tesla's CEO, Elon Musk, did make his original fortune from the Paypal payment platform.
Meanwhile, the volatility in Bitcon prices seems to be stabilizing as the Business Insider article stated recently:
But Bitcoin price charts show volatility has seriously deflated in January. And that's despite numerous negative opinions on the digital currency from Malaysia, Russia, and the world's largest Nordic foreign currency trader - and despite the arrest this week of a major Bitcoin player.
Here's what prices have looked like on Mt. Gox this month. The price this morning was about $930.
The average Bitcoin price across all USD-traded exchanges is in fact $825. But the January stability can be seen here too.
We will conclude with our last argument why Bitcoin is ultimately better than gold as a currency alternative. In the Buffet link above he states;
"Buffett: The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end."
Gold will exist for those who love physical possession of an object and who are fearful. Bitcoins are virtual gold but better because they are finite in quantity. They will never decay. And as opposed to gold, they are procreative as the only way they exist is by employing people who are creating them everyday. In addition, a whole new eco-system of companies such as the ones Mr. Andreesen is nurturing are creating new exciting ways to use this new form of currency on a platform that is not ties to any one country or central bank and can be used by rich and poor alike without exclusion. One has to remember how Napster changed the music industry with its disruptive download capabilities. Without Napster, the iTunes service leading to Apple's (NASDAQ:AAPL) mind-boggling revival may have never happened. Bitcoin is one order of magnitude higher than Napster in terms of disruptive power as it has the potential to transform generations to come in their pursuit of everyday commerce. Just imagine what Bitcoin could do if it were promoted and supported by Apple. Bitcoin support is a way for Apple to leverage their $160 billion cash stash. Maybe only Steve Jobs could make that important decision. Tim Cook, thoughts?
Disclosure: I am long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: If APPL seeded their devices with Bitcoins, I would be long AAPL!