Bitcoin for the Real Sector

On the real sector side, bitcoin is increasingly stable virtual currency with constantly and infinitely declining inflation. The number of possible new coins will be halved every 4 years until there are 21 million bitcoins, and so must be the width of their exchange rate gyrations, which must make the market more predictable and attract merchants to the payment system. But the volume of physical goods and services that can be purchased with a bitcoin may be increasing disproportionately slower, if compared to shrinking in the width of the trading band.
 
The number of new merchants will still be impressive due to social marketing. Demand from merchants comes in the form of about $5 million of bitcoins per month which are spent for goods and services. The bitcoin payment system added 1,900 new merchants in April. The quantity of potential customers is multiplying due to the average of 100 new merchants per day.
 
The valuation of bitcoin depends on the conversion ratio, that is on factual breadth of the customer base, including investors, programmers, users, hackers and speculators.
 
From the standpoint of users, the first and most important competitive advantage of bitcoin is no waiting time for accountverification of payments in that currency. The second is that bitcoin part of lifestyle since it gives freedom and privacy of spending habits.
 
In terms of freedom, the currency is officially not backed by any government or corporation, and any attempt to regulate the market only adds to the impression. The bitcoin is peer to peer virtual currency, which takes money from and into other currencies that consumers may or may not like.
 
In terms of privacy, the bitcoin appeals to users of file-sharing through BitTorrent and web browsing through Tor which are becoming increasingly popular tools for anonymous Internet surfing. Transactions in bitcoins are identified only by the user's wallet can be make anonymous immediate payments system Bitbills attractive to customers who value privacy. Two other more arguable points are that the currency is innovative as money of the future (too distant perspective) and extremely stable currency (false given wide trading range).
 
Most businessmen in the sector started as programmers who then became speculators lured to gain an asset which can be sold at profit because of limited number of possible bitcoin's codes. Nowbitcoin mining is more resourceful, the network's capacity achieved 1 quintillion flops, and programmers unite in pools that allow division of labor. Some of them form startups getting money from people who lack coding skills.
 
Investors give money for startups like Coinbase Inc., Coinsetter Inc. and CoinLab since they are excited about Bitcoin. For example, Chris Dixon considers that demand for Bitcoin comes from investors' frustration about corruption on Wall Street. The unique feature of the product is that it integrates an online wallet, a merchant platform and a service to exchange bitcoin into other currencies, all commission free. 
 

Computation speed of Bitcoin network Computation speed of Bitcoin network

On the financial market side, the bitcoin is destined to have only limited capitalization. There are 11.1 million bitcoins issued out of 21 million possible. The current quote of $118.5 makes it potentially a $2.5 billion market.
 
Financially, the currency is also derivative by definition. Buyers of the currency do not participate in cash markets, making them speculators aspiring to exchange it for a purchase at a favorable rate in the future and Bitcoin a derivative of the actual bitcoin.
 
Price of bitcoin in other currencies depends on the two factors: the volume of products that can be bought and the demand for the currency at a given time. Dependence on physical demand is a plus, when the virtual money has 100 new merchants per day. No matter how many written certificates for the money are, there is no physical bitcoin, mainly because each coin is encrypted, the code is secret, and writing it on paper is a threat to anonymity which is competitive advantage and also a core of the brand. For this reason, a code on a paper certificates is covered by dark substance. The same may be said about the demand for the currency itself.
 
When a big sell enters the market or rumor appears of possible devaluation of the bitcoin, users start to panic and sell their amounts of the virtual currency. In illiquid market this pushes the price down stronger than a big sell itself. As a result, a person who sells at a high makes profit twice, taking it when selling and then buying at low, indefinitely. Firstly, people who sell at a high and buy at a low can be the same. Secondly, not everybody can turn the market upside down. If a buyer makes a bid for certain amount of bitcoins, the uptrend would not begin, and should somebody make a big sell, a programmer may appear who has more bitcoins and who does not want the price to get down. Acting as a specialist or a liquidity provider, such a programmer may buy the bitcoin at the level, where a sell from somebody enters the market, providing liquidity and preventing a sell-off. Information asymmetry makes users sell bitcoins to programmers and supposedly hackers. For example, in mid April bitcoin went from the mid 200s into the mid-60s and then recovered up to 150. Informed sellers can overload MtGox.com, an exchange that concentrates most of the transactions with this currency. When the site fails, panic selling begins and the price crashes. The manipulators take profits on short selling, acquiring large sums of bitcoin which causes a price rise.
 
A feature of the bitcoin is that the threat to a virtual currency emerging in perception of exchange operators can lead to price dumps due to absence of peg. In the end of April, Silk Road, an unindexed drug and weapons marketplace (that can be accessed only through an encrypted network and whose URL changes constantly) attracting 20% of the global daily digital currency bitcoin trade, posted an email by nickname Lance G threatened to crash the site unless given $5,000. In response, the website started offering this amount of money for information which “leads to the arrest and conviction of whoever is behind this extortion attempt”. With $1.4 billion bitcoin in circulation,Silk Road turned out be relatively illiquid as an exchange with total amount of annual sales on the order of $22 million. In early May, bitcoin got tanked again from $145 to $85, then returning to $120 after a two days dip.

USD per Bitcoin rate at MtGox.com exchange USD per Bitcoin rate at MtGox.com exchange

On the consumer side, anonymity and speed of payments in bitcoins delivering comfort turn to falling marginal utility due to increasing memory usage and declining participation in the gold rush.  8 GB disk space already necessary for processing of bitcoin is enhancing with new merchants and larger demand, which may limit importance of those factors in proportion to advances in the mining technology which enhances memory requirements.
 
Bitcoin mining may engage new customers as the gold rush, but some customers may feel more comfortable with pegged game and app currencies, which are intended to lock users in virtual reality of a firm's product. Most of such units are pegged to a major currency at fixed rate, but some offer discount for large quantities. For example, 10,000 of Amazon coins would cost $90, a 10% discount.
 
In terms of consumer protection, greater speed also brings greater responsibility of customer. Unlike systems with verification, Bitbills gives no guarantee of either unsanctioned payments reversal or product delivery.
 
In terms of protection for financial market participants, bitcoin gains more fundamental strength as a currency since the rate is stabilizing into $110-$140 range, down from $266 in April and up from $20 in early 2013 and $35 in March. But the freely floating virtual currency is vulnerable to pump & dump and short & distort because of two factors. One is its limited liquidity comparatively to the major currencies, another is information asymmetry where developers and site administrators have more more insight than users of the system. Ultimately, this may transform into erosion of trust, a far stronger setback than a transaction fee.
 
In addition to that,regulatory status of the bitcoin is unclear. In March the US Treasury said bitcoin exchanges could be subject to the same money laundering rules that govern money services like Western Union. Yet in May the CFTC's watch finally reached the currency as a financial instrument. The authorities are considering regulation of the bitcoin, taking seriously the probability that traders may start creating derivative products from the market. One already appeared, when Anyoption launched what they call binary option on the bitcoin, a product that gives right to buy or sell specified amount of the currency within biweekly interval. The CFTC's attitude is that “we could regulate it if we wanted, that is very clear” because “we have to make sure that we're on guard that whatever is traded is appropriately regulated”.
 
Aside from being a programmer maximizing holdings of the bitcoin for own profit, the only way to get the market down is to create a pool of selling users long enough to make the government to step in. Most recently, Department of Homeland Security seized the account that connects Mutum Sigillum which runs MtGox.com with Dwolla, a payment system, because the Japanese owners of the bitcoin exchange did not properly register their subsidiary as a money services firm when opening its bank account atWells Fargo, which was used to pay customers who cashed out. Affidavit by a DHS agent alleges use of Dwolla as an unlicensed money transmitting business, punished usually by up to 5 years in prison. Of course, speculative evidence of US Government's disgruntlement with the coin did not send the bitcoin lower since it is not a market maker. But judging from recent regulatory fuss, a free float of virtual currency can be market manipulation, and a partial peg may appear, if its trading band does not stabilize, to speculators' dismay. 
 
Mikhail Krylov, director of Department of Analytics at United Traders

  • Bitcoin
  • фундаментальный анализ
  • Биткоин
  • мнение

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