The fourth and final immediate driver for Bitcoin is the investment sector. There has been no investment instrument anywhere like Bitcoin in the past year.
It is regrettable that this article comes just in the aftermath of the MtGox suspension, as the momentum of the currency has been considerably shook up. However, new services continue to pop up at an accelerating rate. I am therefore confident that the current faith dip is quite temporary; there is so much present investment in Bitcoin.
This is an article in a series on what Falkvinge identifies as Bitcoin’s four drivers. This is the fourth article, on investment. The others are unlawful trade, international trade, and merchant trade.
And hence, the fourth driver in Bitcoin is investment in two different meanings. It is an extraordinary investment as a store and accelerator of value, and it is an indirect driver in terms of people being invested in it to the tune of about 90 million US dollars. Let’s take them one by one.
Bitcoin has, on average, climbed about 85% per month in the past year, with an insanely high volatility.
To geeks like myself, that’s just a number without much context. But professional investment managers more or less crap their pants at anything that climbs more than 25% per year. Yes: per year. Bitcoin has climbed 85% per month on average.
I would therefore be very surprised if we didn’t start to see professional investment bankers taking positions in Bitcoin soon. This is a very mixed blessing; it means that the Bitcoin value climbs short-term, and it generates attention around the currency, but at the same time, the Bitcoin economy doesn’t need more hoarders and traders, it needs people who use it for daily transactions. But in order to get to a point where we can use it for more daily transactions, we need more attention around the currency so that more entrepreneurs create even more services.
The Wall Street derivatives have a yearly turnover of about 600 terabucks. Now, this is an insanely high value all in itself that may lead to way more instability than what Bitcoin ever will be capable of, but it shows the high amount of values being splashed around. My point right here and now is that throwing a mere tenth of a percent of this into Bitcoin, the case for which is compelling given the rate of appreciation, would still mean a 600-gigabuck investment.
This dwarfs all previous drivers, and just that makes it a very mixed blessing. For Bitcoin to survive long term, its primary use must be an exchange of value rather than a store of value — albeit both uses will likely be common, even with the same person.
My prediction would be that small enthusiast investors start out, overcoming the technical hurdles of investment, and that it moves from there as liquidity improves. It is still way too difficult to move money in and out of Bitcoin. Greasing this mechanism remains paramount.
The second category is invested people. The current market cap of Bitcoin is in the range of 90 million dollars. A lot of people are individually invested in this to the tune of tens of thousands of dollars.
This is worth comparing to current seed funding for startups, which may get 25 kilobucks for a commercially viable idea. Bitcoin is currently hyperfunded to the tune of 90 megabucks.
Now, of course, this isn’t money that actually exist anywhere in a budget, like it would in a startup. The similarity exists merely on the investors’ side — it’s 90 million that exist as a value today that people do not want to lose, and they can help the ecosystem in order to not lose it. These are not people that must sit helpless like in an airliner cabin, but people that can make a difference to the outcome, each one of these people — and that’s also exactly what they are choosing to do, many of them.
The technical, entrepreneurial people who are invested to the tune of 90 million dollars is the largest asset that the Bitcoin ecosystem has today.
As a final note: as this series of posts has turned into an all-out SWOT analysis for Bitcoin, I will move on to talk about Bitcoin’s opportunities and threats in two upcoming series of posts.