minorman's  Instablog

About this time last year I wrote an instablog about the best performing currency of the year 2011. There was one currency, which gained 1400% against the USD last year - and this same currency is again - by far - the best performing currency this year gaining another roughly 220% against the FEDs USD . .

That is a two-year yield of 4400% vs. USD (from 0.3 USD/BTC to 13.4 USD/BTC). In gold terms, bitcoin is also doing well.

But why does bitcoin keep going up?

Several factors could be at play here. I'll just list a couple.

1) Bitcoin has in November reached block 210.000. This means that the bitcoin p2p network has been running smoothly for four years (longer than almost any centralized e-currency ever has), and - more importantly - with block 210.000, 50% of all bitcoins to ever be issued are now in circulation. The next 25% will be issued over the next roughly 4 years.

This is the beauty of deterministic monetary inflation - No central banker wildcards here!

2) The "bitcoin economy" finally started to gain serious traction 2012. With awesome merchant services like bitpay.com (and others) accepting bitcoin payments (while getting payouts in regular fiat currencies) it is much easier than as ever before; and with companies like bitinstant.com which allows you to purchase bitcoins for cash at 700.000 locations, in places like Walgreen's, buying bitcoins has never been easier. Serious stores like bitcoinstore.com which allow you to buy your next computer or tablet directly with bitcoins are also coming of age. As a result of all this, the average number of daily transactions has exploded from about 3,500 transactions/day (worth $500,000/day) a year ago to 40,000 transactions/day now (worth $3,000,000/day). Chart1 Chart2

3) Attention from big players.

In 2012 the hosting service wordpress.com, which is the 22nd most accessed website in the world (hosting the blogs of The New York Times, CNN, Reuters and many, many more) have started accepted bitcoin - and for all the right reasons:

"PayPal alone blocks access from over 60 countries, and many credit card companies have similar restrictions. Some are blocked for political reasons, some because of higher fraud rates, and some for other financial reasons. Whatever the reason, we don't think an individual blogger from Haiti, Ethiopia, or Kenya should have diminished access to the blogosphere because of payment issues they can't control. Our goal is to enable people, not block them."

Furthermore, the ECB published a serious 55 page report on "virtual currencies" - of course highly centered on bitcoin (as it is the only game in town, really) - showing how (even) central bankers are beginning to understand that bitcoin is not just a fad or Ponzi, but a real near-future contender in global market for monetary services.

4) The bitcoin business space has also started to attract venture capital in 2012. The service provider coinbase.com was funded by y-combinator and the bitcoin mining company, Coinlab, also received funding from Draper Associates and Geoff Entress. Mining hardware manufacturer, Butterflylabs, also attracted significant venture capital from an undisclosed source. Finally, Fred Wilson, principal of Union Square Ventures, has also expressed interest in Bitcoin a couple of times.

5) Many, many more developments in 2012. Partial list:

Bitcoin magazine started shipping;

Launch of The Bitcoin Foundation;

Blockchain.info launched an excellent hybrid ewallet service;

The Bitcoin conference in London was a success;

The birth of provably fair gambling and Satoshidice, Bitzino and others;

bitcoin-2-email service Coinapult;

in-game item exchange is rising;

Explosive growth in the bitcoin reddit forum; ...

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Remember, there will only ever be 21 million bitcoins. Period.

The current "market cap" of all the bitcoins in circulation is just 140,000,000 in USD terms - and it is not yet "viral". If bitcoin goes "Gangnam style" you'd better be ready.

Perhaps it is wise to own a couple?

With many fretting over the fact that helicopter Ben under QE3 is increasing the monetary base by nearly $1 million every minute (!!) there is a currency where the opposite is about to happen.

In five days and a few hours from now, the block reward will drop from 50 BTC to 25 BTC which - exactly as planned - means that the annualized rate of monetary inflation in the bitcoin currency will drop from 33%/yr to 12.5%/yr.

This event (which roughly coincides with the four-year birthday of the bitcoin system) marks the historic turning point when exactly half of all the bitcoins - to ever exist - have been issued. The other half will be issued asymptotically over the coming decades with the next 25% in coming four years and 12.5% in four years after that and so on.

(click to enlarge)

Fig 1: Bitcoin vs. time. The supply of bitcoin is entirely deterministic - and cannot be printed by any central bank or otherwise inflated by decree.

The fact that the bitcoin supply rate is about to be cut in half may naturally be the cause for the recent increase in the bitcoin price, but we can't know for sure about cause and effect. The reason is that Wordpress - which according to Alexa ranking is the 22-most visited website globally - recently started accepting (enthusiastically suppoting, actually) bitcoin and such great news might also be helping bitcoin along. But then again - it could also be a reaction to the fact that ECB now has started to discuss bitcoin in a serious way.

Whatever the cause(es) - the bottom line is that the future is bright for bitcoin and its purchasing power.

(click to enlarge)

Fig 2: Government decree money (Zimbabwe- and US-dollars) vs. open source-, deterministic, borderless and frictionless money.

Bitcoins are currently worth roughly 12 USD/BTC (up 140 % YTD) and may be bought in 700,000 locations.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I am long Bitcoin.

The end of the year is a good time for a pause and for making a status. 

Despite a turbulent year in the Forex markets, where currencies like Swiss Francs, Euros and gold all went up sharply against the USD they have all come right back down to almost exactly the level where they started the year. Only gold has given a slight return (in USD terms) having increased from 1,420 USD/ tr oz. to 1540 USD/ tr oz or so - a modest 7.7% return after a wild ride!

But there is a currency which after an even wilder ride ends the year with solid gains (no - its not the Yen) - I refer of course to Bitcoin.

Starting the year at 0.30 USD the exchange rate for Bitcoin has done pretty well ending the year at something like 4.2 USD for a respectable 14x return (1400%).

This performance comes in spite of a mania in the spring and early summer which caused the price of Bitcoins to accelerate much faster than the Bitcoin economy grew and by June, the Bitcoin price was clearly in a bubble.

The bubble coincided with two blows to Bitcoin when mybitcoin.com turned out to be a scam (classic case of third party risk) and there was a hacking incident on mtgox.com (a major Bitcoin exchange). However - unlike what many internet sites have reported - there was no security flaw in Bitcoin itself and despite hacking attempts and DoS attacks on the network in the fall the Bitcoin network has proven itself highly robust and has now remained "unhacked" for over three years running.

The sharp correction in price (deflating the bubble) and the two incidents spurred an array of "I told you so - Bitcoin is dead" posts on the internet:
Tim Worstall from Forbes on The end of bitcoin I and II
Paul Krugman from New York Times on Bitcoin's "deflationary" flaws
Charles Babbage from the Economist about Bitcoin's troubles
and my personal favorite by Jon Nadler from Kitco with a sarcastic suggestion to pay Greece in Bitcoin
(Nadler's critique is so amazingly uninformed that it is actually quite funny).

But the data disagrees with all this gloom and doom!
Since Dec. 31st, 2010 there has been:
a 14x (1.400%) increase in the USD price of Bitcoin and
a 6x (600%) increase in the average daily volume of Bitcoin (more than 60x when volume is measured in USD) and
an 8x (800%) increase in the number of daily transactions in Bitcoin and
a 72x (7.200%) increase in the computing power (hash rate) of the Bitcoin network (making the Bitcoin network the worlds greatest supercomputer by far).

So in Dollar terms - 2011 has seen the Bitcoin economy grow by something like 6.000% despite all Krugman's nonsense about deflation leading to hoarding. The data proves him wrong (as does logic).
The sheer number of new, great innovations in the world of Bitcoin in just the past 4 months is staggering and the marketplace is getting bigger and more reputeable all the time.

Happy new year!