Bitcoin has broken out to all-time highs again this week. But this time it’s done it rather more quietly.
I recommended buying over a year ago below $500, and I remain very bullish.
Bitcoin – worth more than gold (an ounce of gold, anyway)
One bitcoin is now not just more expensive than an ounce of gold, but resoundingly so.
Gold now sits at $1,255 an ounce. Bitcoin is $1,435. Or it was when I last looked. The way things are going, it will probably be higher by the time you’re reading this. The difference is almost $200.
When bitcoin starts moving, there seems to be no stopping it.
And here’s the thing: it can still go a lot higher. Institutional money hasn’t even got into this market yet. Boy, oh boy, what a thing has been invented.
Here’s a stat, which shows the simply extraordinary amount of wealth that has been created by Satoshi Nakamoto’s invention. It’s a stat, which might make you cry a little as – like Jim Bowen on Bullseye – I say: “Here’s what you could have made”.
In October 2009, when bitcoin was not even a year old, an aficionado, who went by the name “New Liberty Standard”, published the first bitcoin exchange rate. He arrived at the figure by dividing the number of bitcoins his computer generated over a 30-day period into the cost of the electricity his computer consumed. He arrived at the figure of 1,309 bitcoins to one dollar.
With a lack of foresight perhaps surpassed only by the Decca Records executive, Dick Rowe, who turned down the Beatles, saying “guitar bands are on their way out”, New Liberty Standard was actually criticised for valuing bitcoin too highly.
And, as if to prove the doubters right, over the next three months the bitcoin price actually fell, so that by December 2009, there were 1,630 bitcoins to one dollar.
Today there are $1,435 to one bitcoin. If you bought that low, or you mined them at that price, and held on, you have, so far, made 1,435 x 1,630 times your money. That is to say – you turned one pound into £2.3m. The sums we are talking about are simply extraordinary.
When you see the gains that have been made, you can’t help thinking that this is a bubble. But the price can go a lot higher.
Why bitcoin can go a lot higher from here
First, this latest all-time high has been achieved on the quiet, without the media fanfare of previous highs. In fact, if anything, there has been a fanfare of bad news: the clampdown in China; the failure of the Winkelvoss twins to get SEC approval for their bitcoin ETF in New York; the scalability issues which have divided the bitcoin community.
If the price is making new highs in the face of bad news, what happens when the news gets positive?
Making short-term calls on bitcoin is something not even Mr Short-Term Caller himself, yours truly, is prepared to do, beyond saying that the trend is up and the trend is volatile. However, the main reason I am bullish in both the medium and long term is because of the sheer amount of growth that lies ahead.
As my buddy Charlie Morris notes in his latest Atlas Pulse letter, when you buy a bitcoin as a speculation, you are effectively betting that in the future there will be more people who want to use bitcoins than there are now.
I can’t see how there won’t be.
There are so many possible uses for internet cash – and that is what bitcoin is. It is cash for the internet. From tipping to money transfer to micropayments, new ideas are being thought of all the time.
Then there’s the black market. Bitcoin, together with its allies, the online review system and the Dark Net, are currently disrupting the drugs trade in the same way that the internet did for music and publishing. They’re making it better and safer.
Please let’s save the morals of this argument for another time. I’m merely describing what is going on. I’m not passing judgement. The point is the international black market is enormous.
Meanwhile, there is bitcoin’s value as a digital asset. Mainstream money has not yet properly entered this market, much as it may want to. The Winklevoss ETF may have been nixed by the SEC, but they are re-applying. Sweden has just introduced a bitcoin exchange-traded note (ETN), which you can buy over the phone with Hargreaves Lansdown. More will follow.
Then there is, as already mentioned, institutional money. For all sorts of reasons, most of them regulatory, institutional money still hasn’t properly entered this market, much though it may want to. When the institutions are able to start buying, you really will see fireworks.
Bitcoin’s real potential has yet to be realised
But everything I’ve just described applies to bitcoin in its application as digital cash and as a digital asset. Where the enormous potential for bitcoin lies is in one of its underlying off-shoots: blockchain technology.
This technology is still a little bit behind bitcoin in its evolution and in the amount of publicity it has generated. It is earlier in the hype cycle. But the potential for the technology extends far beyond alternative cash systems.
And still, the easiest way to play the blockchain theme is (unless your finger really is on the pulse of crypto start-ups) simply to own some bitcoins. I’m a big fan of Charlie Morris’s analogy that owning bitcoins is like owning shares in the internet in the 1990s.
The ride will be rocky. There are scalability issues still to be resolved (although the resolution is getting closer). But the ultimate destination likes much further north.
How far north? Charlie says $10,000, eventually. He could be right. There’s that much potential growth lying ahead. We’ll see. The next big landmark is probably $2,000.
You can get exposure to bitcoin via spreadbetting provider IG, but the costs are high. You can buy the Swedish ETN via Hargreaves Lansdown.
Or you can take the old-fashioned route and buy bitcoins themselves. The first thing you need to do is get a wallet. Coindesk has some ideas here.