Why You Should Still Buy 0.01 Of A Bitcoin

Remember my February 2014 post, "Why You Should Buy0.01 Of A Bitcoin"?  In this I pointed out that one of the reasons that the price of Bitcoins will rise is that it has to rise, in order for it to function as a currency. At present the maximum amount of Bitcoins that can be traded is 12 million (since that is all that exists). With the current price (of writing) about $620 per BTC, this means that the maximum dollar transaction that can be made is $7,440,000,000 - $7.4 Billion. Slightly down from my March estimate of $10.8 Billion (when the BTC price was higher) but still in the same ballpark.

I also made the assumption that the highest amount of bitcoins held by one individual would be around 12,000. This was very much a rule of thumb estimate, and working on that figure today we would find that the largest financial transaction any individual could make would be 12,000 x $620. 

Or $7.44 Million.

Who holds the most Bitcoins?

Well it turns out my figure of 12,000 BTC was a bit conservative. There are currently three individuals (or groups of individuals) who own the most Bitcoins:

The American rowers and Internet entreprenours, Cameron & Tyler Winklevoss claim to have cornered 1% of all Bitcoins. With approximately 12,000,000 in circulation, this means they could own 120,000.  Since they have recently purchased seats on Richard Branson's Virgin Galactic, their claim is probably accurate.

In September 2013, the FBI closed down the Silk Road online drug marketplace, and in doing so became the proud owners of a single wallet containing 144,000 coins.

While of course the creator of Bitcoin – Satoshi Nakamoto – is estimated to have mined (and therefore presumably still owns) 1 million of the little blighters.

So How Much Can They Buy?

While the majority of Bitcoin owners will have substantially less than these, we can still use them to examine the most important factor in Bitcoin's rise to a global currency – how much can you buy with them?

With their coins, the Winklevoss twins could buy one or more items totaling 74.4 million dollars.  The FBI on the other hand could splash out to the tune of just over 89.2 million dollars. While the probably fictitious Nakamoto has 620 million dollars to play with. While this may sound like incredibly large amounts of money, in the world of corporate finance, it's peanuts. To put things in perspective, Google recently bought Nest Labs for £3.2 billion. With Bitcoin trading at $620, not even Satoshi Nakamoto holds enough  coins to make a purchase like that – he would need to own just over five million Bitcoins.

As a thought experiment, what would the Bitcoin price need to be for the Winklevoss brothers to be able to afford to purchase a company for $3 billion with their 120,000 coins?  That's easy to figure out - divide $3 billion by 120,000.

$250,000

That's right.  If the dollar value of 1 BTC rises to $250,000, Bitcoin becomes a viable currency for purchasing corporations. If it rises to $1,000,000 it becomes viable for purchasing bigger corporations.  

But Bitcoin is Unstable…Isn't it?

The inherent instability and fluctuations of the Bitcoin/Dollar price has led to Bitcoin being compared to a Ponzi scheme, and at first glance this looks to be true. The more people who buy Bitcoin, the more the dollar value increases, until suddenly a significant amount of people sell, and the price crashes, leaving those still holding coins out of pocket.  

In fact, I'm actually one of these at present.

In February I bought 0.1 BTC for £47. With a BTC value of $620 my coins are now worth $62, or £37 at the current exchange rate. However in April, during the aftermath of the MtGox crash, they were only worth £25, so as usual Bitcoin is climbing once more.

So is Bitcoin just another Ponzi scheme? Well a true Ponzi scheme has nothing behind it, no product of worth (other than the inflated worth that the scheme itself confers) and is, like any bubble, certain to burst. However Bitcoin has (and always has had) something waiting in the wings - it's a currency, and it can be used for trading. 

As we have already surmised, the higher the dollar value of Bitcoin grows, the more of the trading market opens up to it.  Look at me. I own 0.1 BTC and can currently make purchases up to about $62.  However in April 2013, Bitcoin was worth about $70. My 0.1 BTC would have allowed me to buy items totaling no more than $7. In May 2012 the price was about $6, and I wouldn't even be able to scrape up a dollar.

Now let's look back at 2011. The price fluctuated a lot more then, going from $1 to $30 in the space of a couple of months, and instances like this are used as evidence for Bitcoin's instability.  But what we do notice is that the higher the price of Bitcoin, the less these price swings seem to be. 2014's peak was somewhere around the $1,000 figure, and last month it dropped to $416. 

Yes that's a fairly big drop, but firstly it's only a 41% drop, and previous price swings have been far higher. Secondly the peak figure wasn't exactly a stable figure to begin with, and prior to that the price had been relatively stable at about $600.

So What about the Future?

Well as of today (June 2014) the current price is $620. A year ago it was $70. Two years ago it was $6. Forgive me for noticing a pattern here, but I can just see 1 BTC being worth between $4,000 and $6,000 a year from now.  By which time my 0.1 BTC will enable me to buy items to the value of between £230 and £350. Not bad for an initial investment of £47.

Of course if I wait another year…