Bitcoin: Positioned for a significant long-term value growth

Journalist:
June 30, 2014

Mastercard spent $299 Million on capital expenditure in 2013, and I intend to conservatively assume that Visa, with its larger payment processing network, spent at least a similar amount. In the year 2013, MasterCard and Visa together processed a combined $7.4 trillion in purchases.  Combining these figures with those of American Express and Discover, the four companies together generated $61.3 billion in revenue, during the same period.  In January of this year, there were approximately 12.2 Million bitcoins in existence. I will agree that many of these bitcoins may well be ‘Zombies‘ or bitcoins that have not been active in more than eighteen months; however, many Bitcoin advocates see Bitcoin as a currency that is expected to increase in value and thus have been hoarding their stock. It is well-nigh impossible to determine which bitcoins are being hoarded and which bitcoins have been de-facto lost.

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There has recently been a huge move to Bitcoin acceptance amongst retailers, and this has led to the situation that over one hundred thousand retailers have moved to now accept Bitcoin. Bitcoiners can now use their currency of choice for the purchase of food, alcohol, clothing, sporting equipment, tickets, real property as well as a veritable cornucopia of services (I have recently discovered that several escort services within the city of London will even accept Bitcoin! I was doing research). This is at a point in time when the value of a single Bitcoin has stabilized and then risen dramatically. There are still, however, a number of  Bitcoin holders that have decided that, it is in their best interest, to hold their coins, choosing to speculate over buying and spending and conducting actual commercial activity. What could change this behavior? Possibly only long-term price stability in the presence of growing acceptance. This may cause a problem as greater use will surely lead to higher value.

Bitcoin is behaving like a medieval agrarian economy: many sellers but few people spend, in part because the network codifies what is essentially Bitcoin’s negative time value of money. The time value of money is the principle that the purchasing power of a currency today could well be completely different from the purchasing power of the same money a year, or two later. In the world of fiat money, we factor in the potential to earn interest and the presence of inflation. The principle of Time value of money is one of the central concepts in the world of Finance and has been around since, at least, Martin de Azpilcueta (1491-1586) of the School of Salmanca.

For example, looking at the cost of a loaf of bread, If a loaf of bread costs $1 and we have a dollar then we can buy that loaf of bread. If we choose, however, to invest that dollar at 5%, then one year later we will have $1.05.  If inflation was 10% however, then the loaf is now 10 cents more expensive and the Time value of money has been 5 cents, or 5%.  Looking at Bitcoin, however, the value of a bitcoin has been increasing since 2009. In July 2012, the value was $7, in July 2013 it was hovering in or around $68, In July 2014 it will probably be in the $550-$600 range. In a world of low inflation and low interest rates that is a significant, abet a volatile return. Assuming a 2% rate of inflation from July 2012 to July 2014 the $7 Bitcoin price would need to have maintained $7.28 to hold the value.  Assuming a value of $560 in July (a conservative but still dangerous assumption with the upcoming Fed’s auction) spending the bitcoin two years ago, with 2% inflation, would have cost the holder $538 in fiat value. Bitcoin is continuing to grow and that growth is encouraging hoarding, hoarding from new investors and hoarding from early converts. Value will continue to rise and the recent period of price stability has meant that more retailers are attracted to come on board as well as encouraging, the first, external, Wall Street, investors to cautiously circle.

Featured image by Shutterstock.

PJ Delaney @P.J. Delaney@delboyir

Masters in Public Administration, Bachelors in Mgt., I live in Ireland, I have a bit of a background in Economics and lots of opinions on everything else.