Bitcoins are a tech stock

What are bitcoins, everybody asks. The usual answer is “they are a distributed, semi-anonymous, peer to peer, cryptographic digital currency” or something along those lines, but there is another simpler way to look at bitcoins.

Bitcoins are a tech stock – tech because they solve a technological problem and have a technological use, and stock because they can be bought and sold on open market.

Imagine a startup arrived in silicon valley one day and said they were going to create a digital currency which would succeed. A digital currency that overcomes the many limitations and fatal flaws of all its predecessors. I wonder how we could quantify it’s value in terms of VC funding, and once it reached a market cap of $300 Million, its value as an acquisition?

Let’s look at three start ups who received over $100million each in VC funding.

Dropbox has received over $250 Million in venture capital funding, for a service that essentially stores files. AirBnB, a space rental service (generally for holidays) has received $119 Million in funding. HomeAway, a vacation property booking services has raised over $500 Million.

And let’s look at a few startups that have sold for over $1billion.

Instagram, a simple photo sharing platform, sold to Facebook for $1billion. Youtube, the video sharing site we all know and love, sold to Google for $1.6billion and Doubleclick for $3billion. Yahoo bought an internet radio service for $5.7billion, geocities (now defunct) for $3.6billion, Overture Services Inc for $1.6 Billion and various others. Microsoft purchased Visio software for $1.3 Billion, NaVision for $1.3 Billion, aQuantive for $6.3 Billion, Fast Search and Transfer for $1.1 Billion, Skype for $8.5 Billion and Yammer for $1.2 Billion

In the above examples I’ve listed 12 companies that were sold for a total of $36,200,000,000. Just 12 Companies!

And let’s not even talk about the tech stocks which have floated on stock exchanges!

All of these companies have one thing in common, commerciality. Each requires a monetary transaction of some description to have been worth investing in or buying, in the first place. Now imagine a technology which facilitates the commerciality of all trade.

The current market cap of Bitcoins is around $300 Million. If bitcoins are a more commercial, more versatile and more readily traded tech stock (and they are), I don’t think it’s far fetched for bitcoin as a tech stock to be worth more than instagram. In that case their value should increase by 330%.

In fact I don’t think its far fetched to suggest bitcoins are a more commercial, readily traded, versatile and also sustainable tech stock than all of the above combined, in which case they are under valued by 11900%. ie. They should be trading at $3284 per bitcoin.

In my mind it goes even further. Apple is a company that simply sells computers, phones and software, and its value peaked at around $650 Billion. I think this is a realistic market cap for Bitcoins to hit within 10 years, at a value per coin of $55,000 each.

Imagine again for a second that the general public could have invested and the ground level with each of the above companies, ala kick starter. With bitcoins they can, and what’s more, this investment is more secure, more liquid, and more useful than any of the aforementioned investments could ever have been.

Bitcoins aren’t just a digital currency, they are a tech stock

4 thoughts on “Bitcoins are a tech stock

  1. Treating them as an investment vehicle is counter-productive to their intended use as a vehicle for transferring wealth. The previous price crash was because of this behaviour when the majority of the market was treating them as an investment which drove prices to stratospheric levels which was simply unsustainable. Whilst the value of a particular BitCoin will always go up due to the inbuilt scarcity mechanism this is most certainly not what they were designed for and is likely to keep causing these rapid boom/bust cycles.

    That kind of volatility limits their potential as a viable alternative currency. As more real money gets injected into the network this starts to become less of an issue as it becomes far more resilient to speculative behaviour. The current run up in value bears striking similarity to the previous crash and I wouldn’t be surprised to see it come tumbling back down to its previous stable lows. There’s every chance that it will stabilize soon but there’s really no investment vehicle that can manage that kind of growth (and be legitimate).

    The real value of each BitCoin should be a fractional representation of all the value contained within the system. Current I believe it’s overvalued as the growth is well out of line with its previous stable equilibriums.

    This is not to say your idea isn’t valid however as the scarcity guarantees that they will always trend up in value and will eventually reach that level at some point (inflation guarantees this). Just that it’s better for BitCoin’s goals as alternate currency if people view it as that rather than some investment vehicle that they can profit from. As time goes on and the potential returns from buying and holding get lower though this will be much less of a problem and it’s at that point that I think we’ll see a lot more mainstream organisations taking BitCoin seriously.

  2. The previous price crash you mention wasn’t a crash at all, but a rather long drawn out process over about 6 months, when bitcoins were very new and poorly understood, and hundreds of millionaires were made overnight. At the time bitcoins were not widely received as payments. While I fully expect the price to correct at some point to some level, it will continue to grow as usage, understanding and acceptance increases.

    The increase in price is as a direct results of the increase in usage and acceptance, ie. the price per bitcoin increases uniformly as bitcoins intended purpose is realised, as you say “as a vehicle for transferring wealth”.

    You comment that there is really no investment vehicle that can sustain this kind of growth. Each of the example companies exceeded bitcoins growth. In 2002 apples shares were worth about $15 each (if I have correct data), now they are worth $466. That growth is not too dissimilar to the growth we see in the price of bitcoins. Other tech stocks (which I can’t be bothered looking up) have vastly eclipsed bitcoins growth in the past 5 years. I think this is why its important to appreciate bitcoins are not only a currency, but also a tech stock.

    You can’t judge the growth of a disruptive technology to be “out of line” or indeed anything other than normal. Bitcoins are a disruptive technology.

    It’s interesting when you say their value will eventually reach those levels, you say “inflation guarantees this” – in your mind you are already seeing bitcoins as an asset and not just a currency because the currency itself is deflating, but the value of the asset is inflating. The value of property continually increases because of inflation, the value of bitcoins increase because of deflation.

    I truly believe the latter half of 2012 was a turning point for bitcoins in terms of their being taken seriously, and 2013 will be a veeeery interesting year.

  3. Bitcoins are a tech stock only insofar as shares in Apple are a currency. It may help some people to think about bitcoin as a tech stock… But frankly I’m not at all convinced the masses understand what a stock is any better than they understand what a bitcoin is – and what people DO understand about stock (that each share represents a relatively equal part ownership of the company) would be inaccurate when applied to bitcoin.

    Bitcoin isn’t a tech stock, if we’re going to use some financial concept people understand we would get closer by calling bitcoin a ‘tech commodity’.

  4. I was talking about the crash that happened back in July 2011 where the price plummeted from $30 highs to $20 in the space of a couple days and then continued downwards for the following 4 months. That was most certainly a speculative bubble bursting, no one denies that, At the time their usage was particularly niche I’ll grant you that but it did show case pretty well the reasons why thinking of BitCoins as an investment was a bad idea. The market was also quite susceptible to manipulation back then, thanks to the low amount of worth contained within the economy.

    If you look at the last months’ worth of growth you got a return of something like 80%, which translates into a yearly ROI on the order of 1156% per year. Compare that to your Apple stock which has experienced a total growth of 4047% over the past 10 years you can get a feeling for why the growth BitCoins are undergoing at the moment is unsustainable. A quick check of the stock shows that there’s only a few that can match this kind of growth and event then fall short of the 1156%. Best I could find was The Goldfield Corporation at 1087%, but they went from a paltry $0.30 to $3.62. I doubt they’ll continue that upward trend for much longer.

    It’s quite easy to judge disruptive technologies as we’ve had plenty of them in the past and the ones that have unsustainable growth always come back down to earth rather quickly. Groupon was one such start up that was considered highly disruptive and had the growth to back it up but now look at where they are. I don’t believe BitCoins are heading that way but they’re certainly trucking in the right direction for a price correction in the very near future.

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