Bitcoin graph

Here's a logarithmic graph of bitcoin prices to date. The long term trend is clear. Bitcoins prices grow as a straight line over time. Since this is a logarithmic plot, that means the prices are actually growing in a consistent exponential.

Put another way, the percentage returns are huge and consistent. How huge? Do the calculation yourself. Print the graph, draw a fit line. Measure the slope. You will see that the price multiplies by 10 every 13.5 months. That works out to consistent 675% returns.

What does this mean for the investor? It means the sellers are irrational. If you managed to buy at the peak, don't sell in the panic. Just keep your bargain and wait 18 months to get your money back.

Bitcoins III

Ok, so my previous post was a little extreme. This time I am going to try to be as conservative as I can and estimate a price point.
 
First, let's compare to other currencies and precious metals. There are around 10T each of Dollars and Euros. There is around $10T worth of gold in the world. There is around $1T worth of silver.

Some bloggers have argued that Bitcoins are not viable as an everyday currency as they will be subject to deflation and hoarding. I think this is a little extreme too. They are disadvantageous from a monetary policy perspective, but that won't matter to the ordinary people who will ultimately decide the future of Bitcoins. How many people do you know who can clearly explain why fiat currency is better than the gold standard? And what exactly is the inherent value of gold or silver. Does anyone really believe the inherent value of gold is $1600/oz? All but a small fraction of that is scarcity and momentum.

Even if Bitcoins are purely used for hoarding (which I think is nonsense; people are using the things for transactions already) they would be analogous to gold or silver today; and if they reach equilibrium, their total value will be somewhere in between. Let's just say $3T.

Meanwhile there are considerable risks. They have been discussed thoroughly elsewhere, so I won't repeat them here. I will take a conservative position that there is a 10% chance they will reach equilibrium, and a 90% chance they will become worthless.

That still leaves a price point of $15,000.

So why does the market not respond immediately? It's because the cost to produce them is so low. The marginal cost today is $0.10 each. So why should anyone pay $140? Think of the Bitcoin market as a bunch of natives who want to sell dumb shiny yellow rocks for what they consider a fortune, to colonists who are happy to take advantage of the natives' ignorance. The natives will compete against each other, and the colonists will too, and the colonists could choose to try and mine the rocks themselves. Both sides are actually rational, the price will fluctuate somewhere between the two prices, and things will only really stabilize once the mines effectively run out and the mining price reaches the market price.

BTW, I just saw a wicked scam. They are offering ASIC mining rigs, in stock, with a very legit looking website. Never mind that the real ones are backordered by around 12 months. The catch? You can only pay using Bitcoins. Good luck getting your coins back when you get nothing! But why run a scam when you can just buy some coins and get rich while you sit on your couch?