Monday, April 1, 2013

This post originally appeared as a response to this article in Forbes:

Thanks for this article; its good to see some opinions on this subject backed up with numbers. I still think you are wrong though.

First, your comparison with the US dollar ignores the effect of fractional reserve banking, which multiplies the ratio of GDP to monetary base by a factor of around 5. Taking that into account, US GDP is only around ten times its monetary base. Still a lot more than Bitcoin, I conceed.

More importantly, Bitcoin is not a normal new currency. A normal new currency is launched by a government with a territory, citizens, tax base and GDP. All of these give those trading the currency some clues to the fundamental value of each unit. Bitcoin has no territory, citizens or tax base. It has a GDP, but that is dependent on the amount it is used, and usage seems to be growing. A better way to think of Bitcoin (as I argue here: is as a disruptive technology; at the moment it is principally of use to those who are poorly served by the incumbent financial industry, but as it improves it will increasingly move up-market by taking business from the incumbents. As it does so the Bitcoin GDP will increase by multiple orders of magnitude, and so therefore will the value of each Bitcoin.

A bubble is defined by the "bigger sucker" theory; that the price will keep going up because there will always be someone willing to pay even more, because the price will keep going up. Bitcoin investment, on the other hand, is driven by a rational expectation that Bitcoin use will increase. If one has a rational expectation that Bitcoin GDP will support a much higher price in a few years time then buying it now looks like a sensible investment. It might also collapse in a pile of bits, but as a speculative investment its certainly worth taking a position in.

Disclaimer: I own some Bitcoins, and I'll think about selling in a couple of years.