A Place For Bitcoins In My Life

Who is not talking about Bitcoins these days ? With the world watching in awe and disbelief at its price action.

A bitcoin is worth 919 USD as of close yesterday.

Source : bitcoincharts.com

How many Bitcoins are there in the world ?
– estimated 12 million Bitcoins in existence. Estimated market capitalisation is 11 billion.

Source : blockchain

Source : blockchain

There is a finite supply and Bitcoins will get increasingly harder to mine digitally over time which leads to holder hoarding their supply instead of using it. Some argue that this is deflationary because less Bitcoins will be needed for purchases in the future.

Who owns most of it ?
47 individuals own 28.9% of the approximately 12 million Bitcoins in existence so far.
880 own 21.5%, meaning 927 people control half of the entire market cap of the digital currency.
10,000 individuals control about 25%.
And about a million people – the rest.
500,000 are out of circulation, whether through government seizure or people losing their passwords.

Source : http://www.businessinsider.com/927-people-own-half-of-the-bitcoins-2013-12#ixzz2qLuTKCmm

How Many People Are Using Bitcoins per day ?
Latest data from late 2012 shows 0.5 transactions per second which is about 172,800 a day.
I am sure this data is grossly understated with Richard Branson accepting bitcoins for his companies and the proliferation of establishments, both online and offline, accepting the currency.

Overstock.com reports that the most popular items bought on their site on day 1 when they accepted Bitcoins were sheets, mobile phone cases, USB flashdrives and bath towels ? spending USD 130,000.


Security ?
Owning Bitcoins involves having a digital wallet, encrypting it and backing it up. There is high security risk involved with incidents of hacking growing or even the loss of a password/computer and the Bitcoin will be lost forever.

If you ask me, everyone is talking about the Bitcoin but nobody is doing anything about it and its use as a currency will take time to grow especially when people are hoarding it. Most of the 900 individuals who own half the coins will have difficulty offloading their treasure trove because the market volumes are not ready for it.

There are about 50 Bitcoin clones right now (the Namecoin, Litecoin, Peercoin and more http://www.businessinsider.com/9-alternatives-to-bitcoin-you-probably-havent-heard-of-2013-11) and more are sprouting by the day, attracting the attention of “miners”. It does make sense because these new coins will be easier to mine (growing harder only at a later stage).

Yet the success of all these depend on the ability to convert their coins into other assets, like use the Bitcoin to buy a house.

Skeptics compare the Bitcoin to the Dutch Tulip Mania in the 17th century with Tulip prices soaring through the roof, dragging land prices and everything else along with it, creating great wealth and causing a massive meltdown when it finally collapsed.

The tulip bulb that were in demand is similar to the Bitcoin in that production took a long period and the supply was limited which led to speculation.

The Bitcoin, however, comes with its entire payment chain as well taking less than a few seconds for a transaction, technology that is seen superior.

I am not one of the million people in the Bitcoin market and will probably not be in the near future.

My feelings border less on skepticism and more on scalability, security and even more on regulatory obstacles.

Scability – how to grow the user base in the market for goods and services.
Stability – the volatility of the asset price.
Security – how to ensure that your savings are protected, imitations, hacking and more.
Regulatory Obstacles – risks of central bank interference in the market that would jeopardise the value of the Bitcoin economy.

The legitimate folks who need the Bitcoin the most are those who are looking for a safe store of their savings, countries like India, Argentina and Venezuela who experience high inflation and people look to gold and the USD to put under their pillows. Yet, how possible is it to deposit USD 50,000 of cash in a good bank these days without being investigated to death ? Thus the anonymity of the Bitcoin is alluring, but not unique as new Bitcoin clones take the shine out of the original.

Hedge funds are taking more than a keen interest in the Bitcoin these days. Good luck to them. To me, it is a new animal, a whippy one and a cause for sleepless nights.

Postscript : This article was written for EZFX at http://www.ezfx.com.sg/market-views/