The reply continued….

5 Apr

The Post article laid out most of the arguments offered by the critics of Bitcoin. I will address each of these objections in a series of posts. The first objection is always “It’s a bubble”. In the 1990’s and early 2000’s when the real bubbles were frothing up, few people outside the economics fraternity had even heard the word used in the financial context. Today of course, every literate person knows that a bubble is when something goes up in price fast, and then collapses in price even faster. People still tend not to know why bubbles occur, as evidenced by the quote from the Washington Post in my first posting. People who have given it any thought tend to fall into two camps; those who believe bubbles are due to a failure of the capitalist system of free markets, which is true to an extent, and those who believe they are due to the unwarranted and harmful interference of the state apparatus in the operation of the capitalist system of free markets, which is absolutely true.

People with no clear understanding of the economic forces that inflate and then collapse financial bubbles see the price of an asset class rising fast, or at least in a sustained rise, and label it as a bubble. Naturally, watching the dollar price of 1 BTC rise from $12.50 to $147.00 in three months, they would suspect a bubble. But they should consider another paradigm for synthesizing bitcoin into their worldview. Bitcoin has gone from an idea to a property valued by the market at over $1.500,000,000 in about 4.5 years.

This property is in the hands of a corporation, but a corporation the likes of which this old earth has never seen before. Rather than a top down, command and control, bank-ridden mechanism for regulatory capture and the funneling of cash into the maw of the state, this is a bottoms-up, voluntary, self-financed association of independent business men and technicians, working together to produce a product with a proven market, in fact by definition the largest and most proven market on earth, the market for money. The product they produce is easy to produce with the right equipment, and anyone is freely licensed to download the entire software suite which stitches the equipment into the cooperative network and begins production of the product. Thus, an investment in computer hardware and electricity purchases a share of this corporation, one that pays a regular dividend, literally like clockwork, as there is no board of directors or shareholder election to decide on the size or timing of the dividend. The size of the dividend has been announced until the year 2140 (131 AB). Thereafter, the dividend will reflect the market valuation of the speed at which transactions within the network are processed.

The dividend is paid in the product itself. The product performs exactly as advertised, at a cost far lower than competing products. The only consumable production input is electrical energy, and the only maintenance cost is the depreciation of solid-state semiconductor technology. Innovators within the corporation, acting independently of any hierarchy of management or authority (since none exists) have already achieved orders of magnitude reductions in the energy input requirements. So long as a few shareholders participate in production the production rate is guaranteed. Once produced, the product cannot be destroyed, and will continue to function with no maintenance, no wear, no degradation.

So the only difficulty in estimating the value of the current and future stock of the product is to estimate the market share that the product will eventually command. In the United States alone, this market was valued in 2011 at between 2.15 and 9.61 Teradollars, depending on which components of the U. S. money supply are considered to be in competition with Bitcoin. Let’s take the lower figure (the U. S. monetary base) as the target market and assume a ridiculously conservative estimate of 1% of this market captured by Bitcoin. Divide this by the 21 million BTC that will be produced, and you get a lower bound for bitcoin’s worth in 120 to 130 years on the order of $100,000 per bitcoin. And that is just the U. S. market.

To me, the notion that such a blatantly superior product would capture only one percent of its target market is ludicrous beyond belief. My personal lowest estimate would be 50%, giving a value of $5,000,000 per bitcoin. And my estimate of when it will reach that level is based on its behavior this year, of doubling in market share each month, and actually almost doubling twice in March. I will be very conservative and guess that the doubling rate will slow to an average rate of once per quarter. At that rate, bitcoin would be approaching the 5 million dollar mark in the first quarter of 2017, a mere 4 years from now.

So no, bitcoin is not in a bubble, and will not be for years, if ever. In my next post I will address the critics who warn of hackers.


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