Bitcoin Rises Over $500 – Is it a valid asset?

Bitcoin has breached the $500 mark as the US Congress convenes its first hearing on “Virtual Currencies.”

 From Zero Hedge:

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Finally, for those curious what a “fair value” on Bitcoin may be, here is what we presented [13]a week ago, courtesy of Global Macro Investor’s Raoul Pal:

So yes: Bitcoin is volatile. Very. That much is clear. But what is not so clear, and perhaps a key reason for this volatility, is just what the fundamental, or intrinsic value of BitCoins is when one strips away the pure euphoric momentum to the upside or downside.

To answer that question, we go to Raoul Pal, head of the Global Macro Investor, [14]and his November 1st recommendation to “Buy Bitcoins”(when BTC was $210 so nearly a 100% return in 1 week) which among other things attempts to “value BTC using a macro framework” or, in other words, the first supply-demand driven fair value assessment of BTC.

His take, and price target, in a nutshell:

A fudge, but not a stupid one

Let’s use a broad guesstimate. One Bitcoin should theoretically be worth 700 ounces of gold or pretty close to $1,000,000, if we adjust existing supply of both to equal eachother.

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. Clearly, I and everyone else believes that 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.

Now, before you shake your head, simply go back to the chart of Gold versus the US Dollar and just recognise that it has risen 8750% since the 1920s. And just remember that Microsoft rose 61,000% from its IPO to it’s peak.

Considering what we know about the world, I personally believe that Bitcoin may well explode in value as more and more people begin to use it.

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.

Now that’s what I call a tail-risk option. It’s either worth zero or it’s worth a truly outstanding amount of money.

I bet you never thought you’d see this in a macro publication. But I’m serious. This just might work.

Bitcoin.pdf

The majority of new Bitcoin demand is coming from China, a region with it’s own problems of government surveillance and technical intervention.  Also in New York it is being considered to give businesses licenses to accept Bitcoin as a form of payment:

On Friday, the New York State Department of Financial Services announced it will be holding a public hearing on virtual currency regulation, specifically considering whether a certification called “BitLicense” might help manage the spread of online currencies like Bitcoin. The new license would require consumer protection services, as well as anti-money laundering requirements, designed to make the currency less useful in cases of fraud and criminal activity.

The announcement emphasized that no decision has been made on the license, but the idea has raised crucial questions among both Bitcoin fans and Bitcoin skeptics. Thus far, Bitcoin exchanges have mostly evaded the money transmission regulations that banks and other currency exchanges are required to uphold, and many worry that the introduction of those regulations might make the currency less appealing, causing its value to decline. But for regulators, it’s a necessary step towards bringing Bitcoin into the mainstream and avoiding large-scale fraud within the community, like the million-dollar TradeFortress heist that occurred earlier this month. As the Department of Finance put it, “it is in the long-term interest of the virtual currency industry to put in place appropriate guardrails that protect consumers, root out illegal activity, and safeguard our national security.”

It’s too early to tell how the hearings and further developments may play out, but the fact that Bitcoin has risen to all time highs before the hearings shows that traders (in this case users, not everyone buying Bitcoins is doing it as an investment) are voicing their opinion by buying.

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