The emergence of the bitcoin is a big story of 2013. One currency strategist from a large bank says fair value is $1300. Another currency strategist has suggested that central banks don’t want to be the last to use it and may put it into reserves, which would challenge the US dollar.
I remain skeptical of both of those claims. That a fair value can be assessed is incredulous. It has no intrinsic value. It generates no income/earnings stream. It has limited utility, that just got even smaller when China’s largest internet platform indicated it would no longer facilitate the use of bitcoins. That the bitcoin (or any so-called digital currency) will be a reserve asset is incredible in the sense that it lacks credibility. The market is too small (overall size and trading volume), too shallow (no bonds, let alone seasoned bond market, or interest bearing securitie), too volatile and does not improve, existing currencies (as it too is not backed by gold or silver). The bitcoin should not even be spoken of in the same breath as central bank reserves.
This Great Graphic was posted on Business Insider by Rob Wile. It shows the distribution of bitcoin ownership, as estimated by a Finnish entrepreneur who is active in the bitcoin network. He, in turn, used data provided bybitcoinrichlist.com, that analyzed the master ledger of bitcoin (called the block chain). The reporter, Rob Wile, then checked that estimate with one of the earliest designers of bitcoin applications, who generally agreed.
As Dec 3, with about 12 mln bitcoins having been “mined” and assuming $1000 a coin, this is what the distribution of ownership looks like. The 47 largest holders, each with at least $10 mln of bitcoins, accounted for nearly 29% of the ownership. Another 21.5% is accounted for by 880 people, with at least $1 mln in bitcoins. This means that although as many as a million people may have bitcoins or fractions thereof, 927 people own half of all the bitcoins then available.
The next 10,000 own 25%, leaving every one else with about 25%. Note too that some 500,000 bitcoins have either been confiscated by governments or the owner’s password has been lost (and apparently the missing coins are in bitcoin heaven).
Such a concentrated ownership speaks to limitations on the ability of bitcoins to reach a critical mass in terms of the network effect required to be money. Not only are there quite limited number of businesses that will accept bitcoins (some US stores are not even equipped to accept food stamp debit cards issued by the government, let alone digital money), but the ownership structure itself limits the widespread use of bitcoins.
A critical imbalance to the recent economic crisis was the concentration of income and wealth. The bitcoin phenomenon has replicated the disparity of the social order from which it arose. Clearly, as more transactions take place on the internet, there is some need to improve payments. Sending money abroad, such as worker remittances, is also duly expensive. Bitcoins and digital money is a wake up call to the credit card companies, consumer units of banks, and the like. They will respond to the competitive challenge.
Green stamps, anyone ?
This piece is cross-posted from Marc to Market with permission.