We’re looking at everyone’s favourite alternative currency in today’s Money Morning – bitcoin.
What’s happening? How is it evolving? Where’s it going next?
Read on to find out…
The bitcoin price is set to fall further
The current bitcoin price is $325.
That’s quite a drop (over 70%, in fact) from the high of $1,240 in late November 2013 – when a single bitcoin was momentarily the same price as ounce of gold. Yet it is still double the price it was 12 months ago.
I expect the price to fall further from here. Bitcoin rose roughly tenfold in the two months between October and November 2013. It got way ahead of itself. Its proponents were worryingly evangelical. These kinds of market excesses take a long time to wash out.
My first target is $200. Then I’ll review.
Bitcoin is in a bit of a Catch-22. It needs a higher price to attract more adopters. And it needs more adopters to turn the price around.
But while I may not be bullish on the price, I am hugely bullish about the technology. In fact, I think bitcoin-related tech is going to be the next great bull market. Like gold in the 1970s, Japan in the 1980s, dotcom in the 1990s and commodities in the 2000s.
I’ve written before about the huge possibilities this tech is opening up as it cuts out middle men everywhere – and the internet is one great middle man. Things will start to get really exciting when the venture capital starts looking at the range of opportunities this dis-intermediating tech is opening up.
For example, online retailer Overstock is now spending $15m developing software based on bitcoin in order to issue stock over the internet – without having to go through Wall Street. The implications are enormous.
So, let’s consider where bitcoin is now in its evolution.
Bitcoin is where the internet was in the mid-1990s
I was watching some old footage the other day of some pundits on a mid-1990s US chat show. They were discussing this new thing called the internet.
“Why do we even need emails – we’ve got faxes”, they mocked. “And what’s with this @ sign? How do you even say it?” They all roared with laughter as one of them then tried to read out an email address.
The conversation moved on to websites. “What’s the point of a website? To buy stuff? I can just go to the shops. And what’s with this www? How does it even work?”
Bitcoin and its associated technology are at a similar stage to the internet in 1995. Words like ‘mining’ and ‘distributed network’ and ‘blockchain’ are as baffling as the @ sign used to be. Bitcoin is facing a similar resistance by incomprehension. Such is the way with all new technology.
But people are starting to get it. Twelve months ago, ‘What is Bitcoin?’ was one of the most searched-for expressions involving bitcoin on Google, according to Coindesk’s third quarter ‘state of bitcoin’ report, which came out yesterday. Now it is not even in the top five.
Coindesk also notes that more and more merchants are accepting bitcoins – 73,000 in total, up from 10,000 a year earlier. 90,000 are forecast by year-end. The more famous names include Dell, PayPal and Target, among many others. Dell even offers 15% discounts if you use bitcoin. Meanwhile, Overstock is selling $15,000 of goods per day in bitcoin, and expects this to double by year end.
Fill in bitcoin price
There are five times as many wallets (6.5 million) as in September 2013. (You need a wallet to keep your bitcoins in. It’s a bit like an email account.) And there are now 251 bitcoin ATMs, when 12 months ago there was not a single one.
Coindesk notes how venture capital is flowing into the sector in a virtual mirror of investment flows into the internet in the early-to-mid-1990s. Since bitcoin’s inception, there has been a total investment of $317m in the sector. But most of it has come this year – $57m in the first quarter, $73m in the second quarter, and $60m in the third quarter. Just this week, another $30m investment was announced in wallet provider, Blockchain.info.
This is all happening despite the huge falls in the bitcoin price.
I spent some time with Paul Gordon, director of the UK Digital Money Association, at his HQ in Farringdon this week. In the offices of the same building there were two bitcoin wallet companies, a bitcoin lender, a bitcoin high-margin trading company, a blockchain data analysis company (to analyse money trends), a point-of-sale device manufacturer, and an ‘alt coin’ company. That gives you an idea of the type of companies that are springing up – every type of financial service you can imagine.
If you were to split bitcoin companies into categories, you would have: exchanges (where you transfer your dollars or pounds into bitcoins); wallet providers; payment processors; financial services; and mining. Companies, such as Blockchain.info, that do two or more all of these things are known as universal companies. They are attracting the most capital.
What’s holding bitcoin back?
Bitcoin also remains the currency of choice for the two biggest black market websites – Agora and Silk Road 2.0. Black markets, love them or loathe them, are often the first to embrace new tech on a practical basis and make it work, so they often show the way.
But there are hurdles getting in the way of wider adoption. Newsletter Atlas Pulse notes that the number of daily transactions has stalled.
Today’s level of 60,000 transactions per day was first reached in February 2013. For the network effect to take hold, you really need to see that number growing far more.
Regulatory problems are also an issue. In London they have been favourable, but New York’s proposed ‘Bitlicence’ is not popular and companies are threatening to migrate. Bitcoin use remains illegal in some countries, notably Russia. Bolivia recently joined that bandwagon.
All in all, we seem to be in that rather boring phase which occurs after the excitement about a breakthrough tech has dissipated, and the reality of making it happen has set in.
But the investment opportunities will come – and I am watching for them.
In the meantime, my advice would be to familiarise yourself with bitcoin, if you haven’t already.
Five-point plan
Here’s my five-point plan to get you started:
1. Go to Blockchain.info and get yourself a wallet. All you need is an email address and password. Blockchain will email you your wallet address.
2. Copy your wallet address, then go to Bittylicious and paste it in, where it says ‘bitcoin address’. Then – still at Bittylicious – deposit £20.
3. Get a friend to do the same.
4. Practise sending each other small amounts of money.
5. Go to a café that accepts bitcoins and buy yourself a coffee.
6. Well done. You’re now part of the bitcoin revolution.
PS. For more on how technology is disrupting the financial industry, check out my colleague David Thornton’s report on mobile banking – you can read all about it here.
• Dominic Frisby is the author of Bitcoin: The Future of Money?
• In the original version of this article, Dominic recommended Coin
base as a place to get a bitcoin wallet. He has since discovered that Coinbase does not operate in the UK yet. He has changed his recommendation to Bittylicious.
Category: Investing in Bitcoin