Why You Should Buy 0.01 Of A Bitcoin

The volatility of Bitcoin only affects you if you have a lot of them. Let's say you have 100 BTC, and the current market price is $800. Well then you've got $80,000 if you cash them in now. Yay you! Except you won't be able to. No online Bitcoin Exchange will have that much money, and if it did, it would probably crash the market if it tried to buy that many coins off you. So your best bet is to hold on to them, right?

OK. But then what happens if someone else does do just that, and the price of BTC plummets to, say, $50 or less? Your stash is now worth only $5,000. Quelle Disaster! 

Or is it? It depends on how much you paid for them in the first place. If you mined them yourself, then you only need to factor in the electricity it cost you (if you even know that in the first place), but if you bought them as an investment, what was the price at the time and how much did you pay? If you paid $10 a coin, then you'll always make a profit if you sell at $50. Not as much of a profit as you would have when the price was $800 of course.

And that's the thing that keeps Bitcoin enthusiasts hoarding – the fact that with all the fluctuations in price, the value of Bitcoin nevertheless has kept on rising. So where's the incentive to cash in your coins when you could get twice as much in the near future? There's always the possibility that the price will drop to a stable figure, and then remain there. In which case you've got what you've got, and you can then either cash it in (and risk causing a price drop) or actually, you know, spend it.

So will Bitcoin ever reach a stable value? Will that value be less or more than you paid for it? Or will it crash and burn spectacularly, leaving you with just a bunch of worthless zeros and ones?

That's what it's all about eventually, isn’t it? Those are the three major questions hanging over the head of Bitcoin like the Sword of Damacles:

1.  Will the price of Bitcoin ever become stable?

2.  Will the eventual price of Bitcoin be worth less that I paid for it?

3.  Will Bitcoin fail, making all coins worthless?

Can we realistically answer them at this time? Not completely, but we can make some assumptions that may help. For a start all three questions are not equal, so it's necessary for us to look at them in the wrong order (trust me on this). Let's look at number 3 first:

Q3. Will Bitcoin fail, making all coins worthless?

If the answer to this one is YES, then the first two become irrelevant. So we'll park this question first, and to allow us to go on and address the other two, we'll assume for now that the answer is NO - Bitcoin will survive.

Q1. Will the price of Bitcoin ever become stable?

By stable, we'll assume we mean that the price of Bitcoin fluctuates no more than ordinary currency does today, allowing slight speculation to take place, but more importantly allowing people to trade goods for BTC, safe in the knowledge that the coins they accepted as payment won't suddenly be worth half or twice as much a week later. We can't answer this one yet, but we can see that unless the answer to this one is YES, then  the next question also becomes meaningless.

Q2. Will the eventual price of Bitcoin be worth less than I paid for it?

And of course the answer to this one depends entirely on you, and what you paid for your Bitcoins.

So where do we go from here? Well, things hinge on whether Bitcoin will succeed or fail. Obviously the hoarders at present do have a vested interest in it succeeding, and to a certainly extent they are helping prevent it from failing by continuing to keep it a marketable commodity. But there is also evidence that it is gaining mainstream ground as a method of payment. It is certainly starting to be accepted as payment by people and small businesses (mainly in the IT or IT-savvy online community).

This goes a long way to increasing confidence in Bitcoin as an online currency primarily designed to be traded (which, don't forget, is actually what it was originally designed to be). And there is also no evidence that anyone accepting coins has made a drastic loss or gone out of business. How come, since the price fluctuates so wildly?

The secret is probably that these online traders aren't hoarding coins. They're accepting them in payment for goods, and then either cashing them out for the current dollar value or exchanging them for other goods themselves. Since Bitcoin values have tended to increase there's little or no risk in doing this, and almost certain reward (if small) since the dollar amount you get back has a strong tendency to be more than the dollar value the goods you sold are worth. OK, there have been weekly dips,  but that's not a problem to the holder of a few coins – you simply hold onto them until the price climbs back up again (as it always does) and you're back in profit. 

What if there's a big crash (and let's be honest, there have been a few), and the price halves? Again, if you're not hoarding coins, this shouldn't affect you that much. You simply hold onto those coins until the price climbs back up.

Or…and this is the clever bit with Bitcoin…you adjust the price of your goods. Bitcoin makes this incredibly easy to do. Let's say that the dollar value of a laptop that you want to sell is $900 and the current price of 1 BTC is also $900. So you charge 1 BTC per laptop. But Bitcoin is divisible, currently to 8 decimal places. Which means the smallest amount of Bitcoin you can charge is 10^-8 BTC, or 0.00000001 BTC. If the price of Bitcoin suddenly drops, and now they're only worth $450, you simply charge 2 BTC for your laptops, or if the price doubles, you charge 0.5 BTC. This model is already being used by one of the most successful operations to take payment in Bitcoin – the Cryptolocker Ransomware virus.

Of course if you've still got 100 Bitcoins left over from last week (when you sold 100 laptops) then you can only get $45,000 back instead of the $90,000 your laptops cost you. If you can really afford to take the hit, then cash them in. If you can't, but you can afford to wait for payment, then hold on to them until Bitcoin climbs back up to $900 (and there's evidence that it will – it has before). But the far safer method is to ensure you don't have 100 Bitcoins hanging around in your wallet, by passing them on (either in return for goods or services yourself, or in return for dollars) as soon as you get them. This is how Bitcoin (and in fact all currencies) should be used, as a payment method, not as a commodity. The less you hoard, the less a price drop hits you. This inherent scalability of Bitcoin may actually help us return to Question 2:

Q2. Will the eventual price of Bitcoin be worth less than I paid for it?

One thing you may or may not know about Bitcoin is that unlike ordinary currencies, Bitcoin has a limit to the amount of coins that can exist.  That limit is built into the Bitcoin algorithm, and is 21,000,000.  That's right.  No more than 21 Million Bitcoins will ever exist. Banks can print more money if they need to, but nobody can "print" more Bitcoins once the limit has been reached.  So how does this have a bearing on the eventual price of Bitcoin?

 

Well, if Bitcoin survives (and we've already assumed it will, otherwise there's no point in attempting to answer questions about its value) then it will do so by becoming a global currency/monetary transfer system that will be applicable in as many circumstances as possible. In other words, you should be able to use it to buy or sell anything that you want, from a loaf of bread to a penthouse apartment in London's West End.

But can't we already do this? Well practically not quite. Look at the current dollar/BTC exchange rate - $900 as I wrote this. With no more than a possible 21M coins in existence, what's the maximum transaction you can make?  That's a simple one:

$900 x 21,000,000 = $18,900,000,000

Eighteen Billion Dollars is the maximum transaction that can be made with Bitcoin at present. But that also assumes that a) those coins actually exist, and  b) you currently own all those Bitcoins yourself (so you can transfer them to the other party).

Well firstly only about $12 Million coins exist at present, because the others haven't yet been "mined".  So that knocks the figure down to $10.8 Billion. Secondly no one user has all of those 12 million coins.  In fact it's likely that no individual user has more than 1% of this figure (120,000 coins) and certainly far less. But to be charitable we'll assume that out of all the Bitcoin users in the world, one of them has 12,000 coins. How much (in dollar value) can be bought with those coins?

Not quite $11 Million.

If Bitcoin is going to be used world-wide, it needs to be able to be used for transactions in the figure of Billions. With the dollar value of Bitcoin at $900 this isn't feasible. It needs to be far higher. How much higher?

Take a deep breath. We are now in a position to answer Question 2…

Q2. Will the eventual price of Bitcoin be worth less than I paid for it?

If Bitcoin is to be accepted as a global currency, it needs to be able to transfer large and small amounts of money. Yes, you've got to be able to pay for something worth $10 with Bitcoin. At present you can. With the dollar exchange rate at $900 per BTC, 0.01 BTC would be worth about $9. But that still doesn't enable us to use Bitcoins to move the Big Bucks around.

Remember that the smallest divisible unit of Bitcoin is 10^-8 BTC (0.00000001 BTC). So for that to be used as the smallest amount of money, it would have to equate to 1 cent in dollar value. So if 0.00000001 = 1 cent…what is 1 BTC worth? Well a cent is 0.01 of a dollar, so the figure is 0.01/0.00000001.

(Cue Doctor Evil)

"1 Million Dollars!"

Which would make the eventual full amount of Bitcoin in existence (21 million) worth 21,000,000 x $1,000,000.

"21 Trillion Dollars!!"

To put that into some sort of perspective, the net worth of the Microsoft corporation in 2013 was estimated at approximately $70 Billion. So providing 1 BTC is worth a million dollars, and 0.00000001 BTC is worth 1 cent, Bitcoin can be used to buy anything from a stick of chewing gum to a major software corporation.

Is it feasible that Bitcoin will ever reach this figure? Well in order to use the designed scalability of the currency to buy a box of matches, or shares in Apple then yes it has to. OK, perhaps not that high. Even with only 10^-7 worth a single cent, that still makes 1 BTC equal to $100,000, and the total net worth of all 21 million coins equal to 2 trillion dollars, which is still high enough for large transactions.

But without an unlimited number of Bitcoins in circulation, It turns out that the dollar value of 1 BTC has to be high to enable trading to be done with a small number of coins. The more coins you have to own in order to trade, the less likely you will be to actually have them. If your transaction requires you to have more coins than you can practically get, then you can't make the transaction. If the transaction reaquires more than 21 million coins (at the current dollar exchange rate) then it would be impossible to make that transaction

Practically of course, it all depends on two things here:

1. What range of products will Bitcoin eventually be used for?

2. How many transactions take place at any one time?

Well Bitcoin probably won't be used for buying and selling major corporations (although it may well be used for buying shares in those corporations), but buying and selling cars might feasibly be done with Bitcoin. With no more than 21 million coins in eventual existence and in order for Bitcoin to be used worldwide, most transactions would need to be of the order of fractions of a BTC.

Taking buying a car as an example, a figure of around $20,000 doesn't sound unreasonable. If such a transaction involved a single Bitcoin, then no more than 21 million such transactions could take place at any one time. But if we used our previous assumption that the smallest unit of Bitcoin (10^-8 BTC) equals 1 cent, then to buy or sell something worth $20,000 would involve the exchange of 10^-6 BTC, or 0.000001 BTC.  So our previous figure of $1 Million for 1BTC is still a reasonable assumption.

At first glance this is an incredibly high dollar value, and the fact that Bitcoins appear to be approaching "ridiculous" values is often cited as a reason why the currency will never succeed.  But will a high value prevent people trading in Bitcoin?  Well no, there doesn't seem to be any reason why just because no individual can afford to buy a single Bitcoin that we shouldn't continue to trade in them. After all very few individuals on this planet can afford to buy a solid gold ingot, but that doesn't stop people from buying far smaller amounts (like the gold ring I have on my finger at this moment). Hundred Dollar Bills exist, and very few people use them, but the Dollar is doing fine.

In fact at the present dollar value of Bitcoin ($900), very few people can now afford to buy a single BTC (although several people do own them) but smaller fractions are well within the pocket of an individual. Currently though the smallest amount of coin that can feasibly be traded is 0.00002 BTC (which would equal just under 2 cents) and as we've already seen, at that value there simply aren't enough Bitcoins in existence to trade in the millions. But as Bitcoin gains acceptance and people want to make transactions involving higher amounts, the price of Bitcoin has no choice but to increase.

So let's look at those questions again.  But this time in the correct order.

1. Will the eventual price of Bitcoin be worth less than I paid for it?

If it becomes stable and doesn't fail, then over the long term definitely NO.

2. Will the price of Bitcoin ever become stable?

As long as it succeeds, then YES

3. Will Bitcoin fail, making all coins worthless?

On balance, probably not. In fact, remember the earlier mention of the Cryptolocker Ransomware virus? The malware authors demanded payment in Bitcoins. This caused a rise in Bitcoin transactions and a corresponding rise in Bitcoin's dollar value. In fact this is the strongest indicator so far that as Bitcoin transactions increase, so does the value of Bitcoins.

So that brings us to a 4^th Question, which is probably the one you're most interested in:

4. Should I invest in Bitcoin now?  Or is it too late?

The current price (as of writing) is $900 a Bitcoin, and it's certainly going to end up far higher. But if you're worried about risk, obviously don't buy a single coin for $900, just remember that BTC is scalable. Buy 0.1 for $90. Or 0.01 for $9. That's not much to lose if the unthinkable happens and Bitcoin crashes. But if it doesn't…

At $1,000,000 a Bitcoin, your 0.01BTC would eventually be worth $10,000. At $100,000 a Bitcoin it would be worth $1,000. Even at $10,000 a coin you're looking at $100.

So the answer is Yes.  Invest what you can afford, and don't mind losing.