The value of Bitcoins

Bitcoins are trading today at $15.50 per BTC. But how do we value something that seems so dependent on perceptions? It is the same with any currency, especially if it is not based on gold. Why should these pieces of paper (or bits) be worth anything at all? It's pure inertia.

I won't try to answer that question, but here's an argument that Bitcoins are grossly undervalued. Today there are some $12 trillion in total world reserves, and less in circulation. This is the total for all currencies, but much of it is in Dollars. Suppose sometime in the next 50 years, bitcoins, with their unique advantages, come to account for 1% of the total world currency. Or similarly, suppose there is a 1% chance Bitcoins will become the dominant currency. There will be 21 million Bitcoins representing something like $120 billion in Today's value. That's $6000 per BTC.

Interestingly, we do not have to discount this amount for inflation, due to the fact that the final number of Bitcoins is fixed. Another way to see this is to note that the value of Today's $6000 will be a larger number of dollars in the future, so if we discount that larger number back to Today, we get $6000. This argument does not actually depend on the '50 years'. If bitcoins EVER become fully dominant, then we can dispense with the 1% and the things are Today worth around $600,000 per BTC.

The point is, an investment worth thousands of dollars is Today trading at $15.50 .

One of the biggest complaints about bitcoins is that "the initial bitcoin distribution is heavily advantageous towards early-adopters". That true, but do these people understand just how early it still is?