The point is, not how is bitcoin created but that it has been created and stands up to the most rigorous testing and analysis. And that means that is has a chance of surviving as the medium of exchange for the cyberworld and potentially the real world too.
In essence, Bitcoin’s success is due to the fact that the man in the street understands that central banks and governments are going to take their money via confiscation or default or devaluation and it is their way of voting against it and them.
There are many of us who share the same fears. We are tired of our money being used as the collateral of others and tired of living in a system that simply refuses to correct its imbalances in any way except devaluing, debasing, taxation and theft.
So let’s look at the price of this new currency:
Let’s look at the logarithmic chart to give us better perspective:
Now let’s look at the price after the initial early adopters bought it and it subsequently crashed in 2011. It then rose from a price of $3 to around $227, which is a rise of 7,500%. It then fell 70% before recovering again.
The rise in BTC has been much larger in percentage so far, because it basically started its creation worth nothing, whilst gold had a multiple thousand-year history of value (but it too at some point was worth nothing).
Then gold suddenly had real value in an inflationary world as Nixon left the gold standard. Gold exploded higher, further than anyone could forecast. People were desperate for gold.
After that bubble, Gold went down for year before exploding once more.
55% of all Bitcoins in existence have already been “mined”. Mining is the process of Bitcoin creation that takes truly enormous computing power and gets more and more difficult to do as less and less are left to be mined.
This is just like gold.
65% of all of the world reserves of gold have already been mined. Gold becomes more and more difficult to get out of the ground as the low hanging fruit has been taken and more technology and more money is needed to do so. Gold requires higher prices for the remaining reserves to be mined. Right now, gold is not profitable for new mines so production is slowing rapidly, but at higher prices, more gold comes on line although in decreasing amounts.
Thus Bitcoin is a currency that is essentially a digital version of gold. Once you understand that, you understand Bitcoin. Like gold it can be held within the system anonymously or held outside the system. Like gold, it only has a value because we attribute it to have a value.
Unlike gold, no one as yet can offer leverage on it.
Chart 6 shows the mathematical difficultly of mining for Bitcoins: (the scale is essentially computing power required)
And because of the massive computing power required, the operating margins of mining BTC have collapsed.
Thus, we have a somewhat restricted supply at these prices.
However, the number of people storing Bitcoins is going up exponentially.
And the number of transactions per day is so far robust.
Meanwhile, BTC has switched from being a mechanism for some people to find an alternative to gold to something more of a transactional currency and a way around capital controls.
Thus we have a classic supply and demand imbalance in the making and acceptance is growing rapidly.
This all sounds good but what is the fair value of such a currency?
Again, we can turn to gold. If Bitcoin exhibits the same properties as gold in that it is finite in amount, is an exchange of value, is transportable and it costs more and more to mine the remaining reserves, then it should have a relative value versus gold which is vaguely quantifiable.
Over the years all asset prices trade in broad bands versus each other, going up and down in secular cycles. Whether it’s Gold versus Stocks, or Oil versus Gold, or Wheat versus Oil, or Property versus Gold. All assets have a relative value and always will do.
You can see the obvious relative value from the chart of Gold versus Platinum. They trade in a range. The same should be true of Bitcoin.
Thus, taking into account that only 55% of all Bitcoins have been mined, versus 65% of all gold, then the total stock of Bitcoins adjusted for the lower supply may well be equal to the same equivalent in gold.
One BTC is currently worth 0.14 ounces of gold. That gives BTC an upside of 5000 times to equal the current price of gold, supply adjusted. Gold may well be much higher than here in the next 5 to 10 years, thus versus the US Dollar the upside for BTC could be multiples of that.
If you stuck $5,000 into Bitcoins and each Bitcoin did go up to a gold equivalent of let’s say, only 100 ounces of gold (not the potential fair value of 700), then at current prices your Bitcoin stash would be worth $3.3m.