The currency collapse has continued unabated. Once again all major fiat currencies have fallen relative to gold. And once again Bitcoin’s performance absolutely crushes gold and silver.
With Bitcoin now entering its fourth year the numbers speak for themselves. All major currencies are rapidly collapsing against Bitcoin. Ominously, under International Accounting Standard 29 there is a case that even gold is in hyperinflation relative to Bitcoin as the presentation currency under IAS 1, 19.9 and IAS 21. And Bitcoin is just getting started.
With Bitcoin performing so well many are probably wondering: “Bitcoin is still around, what the hell is going on?” So let’s take a look at where the money is being made.
BITCOIN MARKET CAPITALIZATION
This chart displays the 200 day moving average of Bitcoin’s market capitalization. This is important to discern the long-term secular trend with regard to Bitcoin and effectively filter out the daily noise. The Bitcoin market capitalization is a function of (1) the number of bitcoins in circulation multiplied by(2) the exchange rate which depends purely on the demand for bitcoins because supply is publicly known.
The number of bitcoins in circulation is constantly expanding but at a predetermined rate. During the first four years the rate was 50 bitcoins every 10 minutes. But then in late November 2012 at block 210,000 the block reward was slashed to 25 bitcoins every 10 minutes. Thus the supply of bitcoins is known and any future expansion has already been discounted by an efficient market into the current exchange rate.
Thus, with supply known the exchange rate of Bitcoins is composed of (1)transactional demand and (2) speculative demand.
Transactional demand is very interesting because bitcoins are a medium of exchange vehicle resulting in an oddly positive elasticity of demand because there are lower embedded costs in terms of time, fees and privacy relative to substitutes or alternatives such as bank wires, checks, Visa, Mastercard, Paypal and etc. Consequently, the price of bitcoins is irrelevant to the transactional demand component. Whether bitcoins are $0.05 or $1,000,000 and because they are divisible without cost to 21 quadrillion atomic units therefore they perform and deliver equally to the user the value of transaction value exchange services.
Speculative demand is from individuals who desire to hold bitcoins in anticipation of a rise in price relative to other assets. Because bitcoins are a sterile asset, like gold, any rise in price functions as a wealth transfer from other assets in the economy to holders of bitcoins.
Make no mistake about it, Bitcoins add incredible value to users because it iscensorship-resistant or in other words non-politicized currency. It allow users to send any amount of money to any other person instantly without a fee to anywhere in the world without any restrictions whatsoever. E-Gold, GoldMoney(payments have been restricted to only among Jersey based holdings), Liberty Dollar and even gold through confiscation by FDR, Stalin, Hitler and Mao were all censored.
But Bitcoin is a completely different and wholly new rapidly metastasizing beast: the censorship-resistant digital financial honey badger.
WHAT ARE BITCOIN TRANSACTION FEES
As many who invested during the Internet bubble of the early 21st century came to understand many metrics can be ‘puffed up’ or faked. This is certainly true with regards to the Bitcoin economy and one reason I like to monitor total transaction fees.
When bitcoins are sent the sender can optionally include transaction fees to benefit from faster processing and confirming by the Bitcoin network, the largest distributed computing network in the world. Transactions without fees will still be confirmed it just may take extra time and really is not a big deal at all. By including a fee then hungry Bitcoin miners prioritize the transaction and include it in a block resulting in faster confirmations of around ten minutes at most.
The prioritizing of Bitcoin transactions takes place automatically in an auction type market. If Bitcoin ever grows in scale to a size like Visa with 12 billion transactions in Q2 resulting in $2.2B of net operating revenue then this is how scarce resources would be rationed. But currently that is not a concern because there is a ginormous amount of excess mining capacity for current usage levels.
Thus, the current average transaction fee of 0.0005 BTC, with a cost of about $0.00675 or a little more than half a penny, will result in the highest priority and extremely quick confirmations.
WHY BITCOIN TRANSACTION FEES ARE IMPORTANT
The above chart shows the total transaction fees Bitcoin miners received on a daily basis and is normalized to a 200 day moving average to filter out the daily noise. As the chart plainly reveals Bitcoin is rapidly being adopted and used on a daily basis.
Bitcoin users incur about US$400 of daily transaction fees to send approximately50,000 daily Bitcoin transactions with optionally included fees. And that is just transactions where people are actually sending Bitcoins and want priority processing. From my own experience I pay for priority processing in less than 10% of transactions and I do not engage in many Bitcoin transactions because Bitcoin is used merely as a settlement currency and is not yet widely adopted by all the merchants who I purchase goods and services from.
For example, I only need to buy VPN services from Private Internet Access once per year (tip: always use a VPN and never trust a VPN that does not accept bitcoins).
So, despite the usage base still being relatively small and niche there is obviously asignificant amount of actual economic activity going on under the hood of Bitcoin. As adoption increases beyond the currently niche base the network effects will really start to take hold making it even more useful and valued.
PAYPAL – THE INTERNET CURRENCY KING
The current King of the Internet payments ecosystem is Paypal. It has 117 million activity registered accounts in 190 markets, had $1.37B of revenues in Q3 2012, represnts 40% of eBay’s revenues which has a $67B market capitalization (40% would be $26.8B), had ‘$4,423 in Total Payment Volume every second in Q3′ in 6.4 million payments per day. Paypal expects to process $10 billion in mobile payments in 2012.
Paypal is clearly the golden goose of eBay and wields monopoly power which it has used to the chagrin of some users who started the website Paypal Sucks. Lately, it has begun to target particular types of businesses, like those with millions of users such as MediaFire, Putlocker and DepositFiles, and stop processing payments.
One of these large file upload sites recently integrated Bitcoin as a payment option and the effect on new wallets being created has been noticeable adding more users in two weeks than GoldMoney has in total.
POTENTIAL BITCOIN PRICES
Where could Bitcoin prices go? Really, really high. Or they could become worthless overnight. After all, even though Bitcoins are tangible and therefore immune to counter-party risk like gold they areillusions because they are non-corporeal. Perhaps there needs to be a new category of currency as discussed in The Great Credit Contraction; illusory tangible money. But how high is really, really high?
First, let’s put into perspective how the past performance of gold’s complete collapse relative to Bitcoin could affect your net worth.
17 January 2011 we recommend using Bitcoin to protect your privacy in Bitcoin – The Best Financial Privacy Is Probably Here … Probably. If you had traded oneounce of gold for bitcoins then today you could trade those bitcoins for 31.6 ounces of gold.
19 December 2011 in Solid Bitcoin Consolidation Finally Bears A Bitcoin Breakout I stated:
Taking the current price of $4.00, the 200 day moving average of about $8.50 and extrapolating this upleg with a 12x 200dma top we could see a price of around $80.00 per BitCoin. Is this speculative? Yes. Would I bet on seeing $80 per BitCoin by around June or July? Maybe if the odds are around 5%. But I would take a bet for BitCoins to hit $7.50 by June or July at around a 50-70% probability.
If you had traded one ounce of gold for bitcoins then today you could trade those bitcoins for 3.25 ounces of gold.
Obviously, over the past couple years gold has completely collapsed relative to Bitcoin; gold’s performance relative to Bitcoin is worse than the Argentina Peso against the USD.
Second, Bitcoin is still in beta version 0.7.2. This is still experimental software. As more features get built and released it will be even more powerful and network effects will take even greater hold.
Third, buying a Bitcoin (Money Over Internet Protocol) is like buying stock in the Internet, Email or VOIP. Imagine if you could have bought stock in HTTP (Hyper Text Transfer Protocol), SMTP (Simple Mail Transfer Protocol) or VOIP (Voice Over Internet Protocol) and you received value every time every website is ever visited, every email ever sent or every call ever made over the Internet whether through Vonage, Skype, etc. and just like there are businesses built completely around HTTP, like Google or Yahoo, or VOIP like Skype (founded in 2003) so likewise there are companies built completely around Bitcoin. Microsoft purchased Skype in May 2011 for $8.5B.
Fourth, Bitcoin makes payment of taxes more voluntary because the probability of being caught is decreased and even if caught it is impossible to seize the bitcoins without the private key. Plus, their flexibility allows them to be used in many creative ways by estate and tax planners or asset protection specialists. Bitcoins have not been made illegal in any jurisdiction and some jurisdictions like Sweden orFrance have granted significant protections to Bitcoin entrepreneurs. Plus, there are no silly FBAR or FACTA reporting requirements for bitcoins held in a bitcoin address not held with a third party.
Fifth, the 22nd largest site on the Internet, WordPress, which creates the open-source software that powers over 100 million blogs, announced on 15 November 2012:
PayPal alone blocks access from over 60 countries, and many credit card companies have similar restrictions. Some are blocked for political reasons, some because of higher fraud rates, and some for other financial reasons. Whatever the reason, we don’t think an individual blogger from Haiti, Ethiopia, or Kenya should have diminished access to the blogosphere because of payment issues they can’t control. Our goal is to enable people, not block them.
Bitcoin is a digital currency that enables instant payments over the internet. Unlike credit cards and PayPal, Bitcoin has no central authority and no way to lock entire countries out of the network. Merchants who accept Bitcoin payments can do business with anyone. …
With Bitcoin we join a new digital economy that doesn’t leave anyone behind, essentially making financial transactions open source — something WordPress.com is behind 100%. We’re proud to support bloggers from all over the world by providing a Bitcoin option.
A McKinsey Research report found that the Internet accounted for about 3.4% of total GDP, contributed to 20% of GDP in mature countries and ‘The Internet economy, now larger than that of Spain, surpasses global industry sectors such as agriculture and energy.’
Sixth, the FDIC insures $9T of bank deposits. Of course, with such counter-party risk how good is that guarentee? Additionally, there are approximately $20-30T of bank deposits in offshore tax havens.
Seventh, a significant portion of the price paid for many collectibles, like the $120m Scream or diamonds, is largely due to the scarcity, ease of transportability and general censorship-resistance and immunity to counter-party risk characteristics that are shared with Bitcoin.
Eighth, companies can drastically reduce their expenses by accepting Bitcoin. According to the National Retail Federation ’Credit and debit-card fees have tripled over the past 10 years, to about $50 billion a year. That money comes straight out of retailers’ profits’ and in this economy both consumers and merchants are looking to cut costs anywhere they can. Think about it, every gallon of gasoline has embedded a $0.25 fee to the credit card company.
For example, Amazon had net income of $631M on $48.1B of revenue. Assuming they pay 0.5% transaction fee to accept credit cards, which would be extremely low compared to the 2-4% most small businesses pay, then that would add $240.5M to the bottom line; an increase of 38%! And Amazon is just one potential company to accept Bitcoin.
Plus, many of the small businesses that currently accept bitcoins keep those proceeds stored in Bitcoin instead of exchanging them for fiat currencies. This increased demand for bitcoins and decreased demand for fiat currencies has a tremendous leveraged effect on the fractional reserve banking.
Ninth, a significant amount of capital is held by corporations on their balance sheets as working capital and generally classified as current assets. For example, on 16 December 2008 I wrote about how Oil Majors Should Just Buy Real Gold and revisited the topic on 28 November 2009 in Gold And The Oil Majors Revisited.
On 8 December 2008 gold closed at $772.25 and by 27 November 2009 gold closed at $1,177, a 52.4% gain. …
In 2008 the five oil majors repurchased about $54.2B of stock. Exxon with $35.4B, Chevron with $6.8B, Total with $1.3B, British Petroleum with $2.6 and Conoco Phillips with $8.1B. The average price of gold in 2009 through October was about $941.
So let me get this right. Instead of holding increasingly worthless colored coupons the oil majors could have diversified their currency holdings to ensure they could make payroll and with about a third of what was spent on the share repurchases could have bought the entire annual production of platinum and the entire above ground stockpile of silver. Or assuming the average price of gold they could have bought about 1,791 metric tons of gold.
Tenth, Bitcoin would make a wonderful settlement currency for a small country which could primarily export information technologies. For example, Iceland has an extremely protective freedom of speech legislative environment where the statutes were crafted by Wikileaks members who were targeted with a Banking Blockade because of political speech. Icelands wants to use its extremely cheap geothermal power to run data centers.
Ice Servers is a pround Icelandic company that sells webhosting services, accepts bitcoins and takes advantage of these three competitive advantages: (1) better legal protections for website owners, (2) cheaper power and (3) great geographic location for US and European markets. This is a prime example how the Icelandic economy which is currently about twice the size of the Bitcoin economy can integrate with it.
So, Bitcoin is cheaper, faster and more private that fiat currencies, bank wires and credit or debit card payment systems. Bitcoins are not subject to counter-party risk so holders do not need to worry about their bank or financial institution failing like Wachovia, Fanny Mae, Bear Stearns, Lehman Brothers, MF Global, etc. and need a bailout that comes from printing fiat currency out of nothing.
So, really, there is no limit to the upside potential of Bitcoin as it continues to suck in capital resulting in an expanding financial event horizon. Gold, with no counter-party risk, is a refuge from the current unstable and failing fiat currency fractional reserve banking and financial system. But Bitcoin is not just a refuge but also asolution to that zombified system. It would be ironic if the massive wealth transfer the gold bugs have predicted goes not to holders of gold but to holders of bitcoins.
And the market has a way of financially rewarding the solutions, instead of refuges, because they add more value to society. And that is what gold’s currency collapse relative to Bitcoin is signaling; a massive wealth transfer has started from holders of assets in the traditional fiat currency system, gold, silver, etc. and other assets to holders of bitcoins.
Keeping those thoughts in mind then let’s consider some potential bitcoin prices in comparison to other data points within the worldwide economy.
|Investment||Marketcap||BTC price @ 10.5m bitcoins||BTC price @ 21.0m bitcoins|
|Cardero Resources (CDY)||$41M||$3.90||$1.95|
|Brazil Resources Inc. (BRI.V)||$45M||$4.25||$2.12|
|Uranium Resources, Inc (URRE)||$56M||$5.30||$2.65|
|Bitcoin on 31 December 2012||$141M||$13.43||$6.71|
|ATAC Resources Limited (ATADF)||$168M||$16.00||$8.00|
|36.7B ISK – Iceland M1 (GDP=$6.8B)||$289M||$27.52||$13.76|
|Gold Resource Corp. (GORO)||$809M||$77.01||$38.50|
|4.5% of Tulsa, OK $44.8B GDP’s||$2B||$192.00||$96.00|
|Junior Gold Miners ETF (GDXJ)||$2.8B||$269.52||$134.76|
|91.6B UYU – Uruguay’s M1 (GDP=$46.7B)||$4.8B||$457.14||$228.57|
|Western Union (WU)||$8.1B||$771.43||$385.71|
|4.5% of Singapore’s $257.4B GDP||$11.6B||$1,103.14||$551.57|
|Silver Wheaton Corp. (SLW)||$12.2B||$1,163.81||$581.90|
|Newmont Mining Corporation (NEM)||$22.1B||$2,107.62||$1,053.81|
|Paypal (40% eBay)||$26.6B||$2,533.33||$1,266.67|
|Barrick Gold Corporation (ABX)||$33.4B||$3,180.95||$1,590.48|
|4.5% of NYC’s $1.28T GDP||$57.6B||$5,487.86||$2,743.93|
|AAPL’s Total Current Assets [TCA]||$57.7B||$5,495.24||$2,747.62|
|7.5% of Internet’s $1.5T GDP||$112.5B||$10,714.29||$5,357.14|
|TCA of 5 Internet Major’s (AAPL, GOOG, EBAY, AMZN and FB)||$149.4B||$14,228.57||$7,114.29|
|TCA of 5 Oil Major’s (XOM, CVX, BP, COP and TOT)||$336.6B||$32,057.14||$16,028.57|
|Apple Inc. (AAPL)||$489B||$46,526.67||$23,263.33|
|7.5% of System D’s $11T GDP||$825B||$78,571.43||$39,285.71|
|4.5% of world’s $55.6T GDP||$2.5T||$238,095.24||$119,047.62|
|Fed’s Adjusted Monetary Base||$2.6T||$250,761.90||$125,380.95|
|FDIC insured bank accounts||$9T||$857,142.86||$428,571.43|
|165k tons of gold (5.82B oz) @ $1650/oz||$9.6T||$914,285.71||$457,142.86|
|Tax haven bank accounts||$30T||$2,857,142.86||$1,428,571.43|
The Great Credit Contraction continues as holders of capital will increasingly seeksafe and liquid assets. The currency wars are heating up and the foreign exchange oceans of capital are getting increasingly tumultuous due to politicization of the medium of exchange.
Bitcoin’s liquidity has greatly increased during the past year and can allow the creative user to completely disinter-mediate from the current fiat currency system. All major fiat currencies have continued declining relative to gold. But gold has completely collapsed relative to Bitcoin.
Therefore, holders of bitcoins continue to be beneficiaries of a tremendous wealth transfer from holders of fiat currencies, gold, silver, real estate, stocks, bonds and pretty much every other asset. Bitcoins have already turned out to be the trade of the decade for many of our readers and may likely be THE trade of the 21st century before these massive worldwide currency wars and collapses play out.