Bitcoin hits $1000. Where is it going?

I’m bullish on Bitcoins, from a price perspective and also from a technology perspective.

Like many out there, I’m kicking myself for not jumping on the bandwagon sooner. I remember when they were $5 and I was first reading about them. I remember when they were less than $1 per coin, and my office computer could mine about 1 per week, thinking it wasn’t worth the electricity cost. I remember wanting to buy 200 of them at $10 each as a speculation play with our InvestorGeeks ad money, and then wanting to use my own money.

At those times, buying Bitcoins was harder to do and more confusing. I kept putting it off. Now, services like Coinbase are making it pretty easy to buy and sell them. FWIW, I now own about 8 of them personally purchased from $65-$350 each.

I just replied to a post on Howard Lindzon’s blog with some of my thoughts RE why Bitcoin is the perfect vehicle for speculators and why good or bad the price is likely to go up. I may post more about Bitcoins here from time to time along with other investing writing.

Bitcoin is really useful is so many ways and the technology is just getting started. But the asset is just perfect for speculation. It’s designed to have 0 inflation, which means it has basically infinite deflation. It trades 24/7. And there is no real way to value a Bitcoin. So unlike cerca-2000 internet stocks, where you can say “hey this company isn’t actually making any money”, with Bitcoin there is no “main street” valuation to add any sense into the price levels.

FWIW, my favorite valuation method is to compare the total amount of transaction activity to the GDP of US states or small countries. So if people do as much commerce using Bitcoins as is done in the state of Pennsylvania in USD, that would be about $400B per year or a $400B “market cap” for Bitcoin, which is about $20,000 per coin. Of course that makes hardly any sense, especially when a lot of the Bitcoin transaction volume is investing and moving money around in accounts. But that’s kind of the point. We have no f’ing clue how to figure out what the value of a Bitcoin is.

The 1% is sitting on a lot of money and as they put some of that into Bitcoins, the price is going to go up. It has some room to run IMO. As more companies, investors, and people in general get skin in the game, there will be a limit to how far prices can crash. Lots of people have a stake in making sure Bitcoin doesn’t become “worthless”.

Of course some more experienced investors who were paying close attention to other “bubbles” in the past probably recognize this as a case where smart/wealthy speculators are taking advantage of other dumb/wealthy and not-so-wealthy speculators.

So the speculation that is a large part of the current price level is going to stick around. I find it hard to believe that with increased use and spending of Bitcoins (public ATMs, everyone with a Bitcoin debit card, Bitcoin transactions baked into internet ecommerce) that the speculation will die down.

We have a few more waves left in this IMO. That log chart is probably a good way to try to time it, but be careful.