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Looking Into Bitcoin Investment and Profitability.

I haven't posted on here in a while. I've been busy and I've also been intrigued by this thing called Bitcoin, maybe you've heard of it.

All jokes aside, Bitcoin has been building up quite a head of steam lately and I’ve decided to pay attention. I’ve been doing a lot of reading and the idea seems sound, to a degree. I haven’t looked too much into the programming and I probably won’t since I don’t speak that specific dialect of nerd. But one thing I have looked into is the profitability or value of converting or at least investing in some Bitcoins.

Last night I was doing some crude math with bitcoin values just trying to see where bitcoin is and where it can end up. . It’s probably safer to assume that bitcoin, if successful, will only be one of a number of major currencies in use (I can best imagine a scenario or 3 or 4 different currencies at play). It’s also highly likely that bitcoin will fail. There are some programming or coding weaknesses, especially in privacy/anonymity, and other issues regarding government intervention and regulation, outlawing and so on. For simplicity’s sake, I’ve assumed that bitcoin will eventually replace the entire US currency system but not the entire world’s system. I’m sure if I my intrigue of bitcoin grows a little more, I’ll probably build a few models, factoring in growth, size and risk factors but for now just plain crude math.

Here’s some simple numbers:

- There will only ever be 21 million bitcoins created

- Each bitcoin is currently valued at around $75 a coin (3/25/2013)

- In 2009 there was about $8 trillion US dollars in existence.

- Since 2009, the Fed has significantly increased the world’s US Dollar supply, but I don’t know the exact number. Let’s leave this figure at $8 trillion for now.

I won’t try to calculate bitcoin’s value based on the world’s total money value because that would first of all be beyond optimistic, even more so than this post is already and secondly bitcoin is supposed to bring about a new revolution in money where people have competing, free market currencies, so it would be pointless to assume bitcoin will hold a monopoly on the world’s currency. It was never supposed to do such a thing.

So, what happens if bitcoin replaces the US dollar completely? Well, it would have to carry the weight of the value of those dollars, or come close to doing so. But for the sake of simplicity, let’s just say that it would have to replace the dollar completely.

This means that 21 million coins would have to hold a value of 8 trillion dollars.

That’s an absurd amount. How absurd?

Well, each bitcoin is currently worth about $75. There are 10 million or so coins currently in circulation. Let’s assume that the total value of bitcoins stays static until 21 million coins are released. Each coin would be worth about $36.

That’s about 0.01% of what a bitcoin would have to be worth for it to replace the US Dollar. If you’re not good at math, that means that each of the 21 million bitcoins would have to be valued at $358,000 each. That’s an increase of over 4,700%.

Just to bring some gravity to the situation, this is all calculated on extremely gracious assumptions. There are still very real risks in investing in bitcoin.

The price needs to stabilize for the currency to become something more than just an investment. If the price keeps climbing people will only invest and hoard bitcoin. Very few will be willing to pay with or trade bitcoins out of fear that they might lose out on the next price jump. Some of this is due to the fact that some “investors” still look at the dollar as their main currency and see bitcoins as investments. Others because bitcoin isn’t accepted as a payment method in the overall marketplace. Unless people start to openly accept bitcoin, there’s no real way to obtain or capitalize on the value of bitcoins short of “cashing out”.

Here’s where competing with governments hurts bitcoin. Governments can still step in and make it illegal to buy, sell or hold bitcoins. This would mean that unless you can use bitcoins to buy things, there’s no way to extract the value and the investment is now useless.

There are other real fears with bitcoin; The whole thing could be a big scheme by early adopters to pump and dump. The code can theoretically be hacked or manipulated at some point. Electronic records are much more potent that standard paper keeping. In the electric world no one is really anonymous, some just do a better job of hiding their tracks.

It’s safe to say that it’s probably worth investing $100, $500 and maybe even a $1,000 in bitcoins, if you can afford it just for the fun of it. It will make for a good story, if nothing else.

I’m personally still holding out but watching with a curious eye and a fist full of money to invest.

Thanks for reading. For more things I write about, check out: http://sugashane.tumblr.com/

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Ok so here is my deal...

97% of the worlds currency is... digital.

Probably 90% of your Federal Reserve notes are digital.

If someone were to hack your account at a bank, they could steal all your funds, digitally. This account is held at 1 bank, with 1 set of security parameters.

Bitcoin is open source, anyone who wants to see how the program works, if they want to, can. Every Bitcoin before it's traded must be validated by "miners". Therefore, the accounting system is double, triple, a ridiculous amount over checked. Every transaction, checked and validated by the public.

Ok soo...A small group of accountants at a bank or +100k bitcoin owners whose best interest it is to keep their investments sound...hmmm.