Major Wall Street Research Firm Tackles Bitcoin Mania; Sees Significant Value
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A few days after Wedbush's glowing report about Bitcoin, postulating that it can be worth 10-100x the current price, another Wall Street research firm weighed in on the virtual currency that has everyone's attention. The latest Wall Street firm is also positive of Bitcoin, but has a much more subdued viewpoint on the upside in price. Still, with Alan Greenspan calling Bitcoin a "bubble" yesterday and today's news that China's central bank is cracking down, the latest research is being viewed as a positive for the validity of Bitcoin.
David Woo, FX and Rates Strategist at Bank of America Merrill Lynch, believes Bitcoin can become a major means of payment for e-commerce and could emerge as a serious competitor to traditional money transfer providers. As a medium of exchange, Bitcoin has clear potential for growth, according to the strategist. That said, his fair value analysis implies a maximum market capitalization of Bitcoin of $15 billion, or $1300. This is above current trading levels of $1052, but just fractionally above the all time high of $1242 set last week.
Commenting further on Bitcoin as a medium of exchange, Woo notes that since April 2013 significant investment was made into start-ups that develop and promote Bitcoin as a means of exchange for merchants (as opposed to speculation investment on the exchange). "For example, CoinLab has received seed money to incubate other Bitcoin start-ups like mining companies and exchanges," he highlights. "The most notable company to accept Bitcoins may be Baidu, a major Chinese portal, which began accepting Bitcoin for its online security services in October 2013."
The advantages of Bitcoin as a medium of exchange, according to the firm, are: Bitcoin is attractive as it offers low transaction costs; Bitcoin offers an attractive alternative to cash in terms of security, transparency of transactions, and counterfeiting; There is a finite supply of Bitcoins; Bitcoin's relative anonymity is advantageous to citizens of crisis countries; “Winner Takes All” market ensures that increasing acceptance and popularity of Bitcoin increases likelihood of success; Bitcoin offers large benefits (from an asset allocation perspective) given its negative correlation with risk sensitive assets, much like gold.
The disadvantages of Bitcoin as a medium of exchange, according to the firm, are: Bitcoin's role as a store of value is seriously compromised by its elevated price volatility; Regulators could try to impose controls that would increase the transaction costs for using Bitcoin despite its efficiency and the transparency relative to cash; The quality of Bitcoin exchange security, where consumers exchange dollars for Bitcoins (and vice versa) is suspect; Seigniorage is currently accruing to the “miners” of Bitcoins who have the fastest CPUs; A 50 minute wait before payment receipt confirmation is received will prohibit wider use; Bitcoin's use as an international currency will likely be hindered by the fact that it is not a legal tender.
Woo combats the notion that bitcoin will be used as a store of wealth for the black
market/underworld. "... the fact that all Bitcoin transactions are publically available and that every Bitcoin has a unique transaction history that cannot be altered may ultimately limit its use in the black market/underworld," he said.
On volatility, Woo said Bitcoin's role as a store of value can compromise its viability as a medium of exchange. "Its high volatility, a result of speculative activities, is hindering its general acceptance as a means of payments for on-line commerce," he said.
Commenting on if bitcoin is a bubble, the strategist said if one assume Bitcoin becomes (1) a major player in both e-commerce and money transfer and (2) a significant store of value with a reputation close to silver, their fair value analysis implies a maximum market capitalization of Bitcoin of $15bn (1BTC = 1300 USD). "This suggests that the 100 fold increase in Bitcoin prices this year is at risk of running ahead of its fundamentals," Woo said.
Digging deeper into the value of Bitcon, Woo doesn't offer a forecast but offers preliminary thoughts on how to approach the fair value question. With Bitcoin a medium of exchange as well as a store of value, he said it is easier to think about fair value by treating these two purposes separately. On the value of Bitcon as a medium of exchange, he sees the maximum market capitalization for Bitcoin’s as a medium of exchange at $5 billion for B2C e-commerce and $4.5 billion as means for payments, or a total of $9.5 billion. On a store of value, he sees the maximum market capitalization for Bitcoin's as a store of value of $5 billion. Adding them together he gets to approx. $15 billion, or $1300. All this said, Woo said this does not mean Bitcoin price cannot rise further (as an object of speculation) and thinks the recent rise of Bitcoin price could soon run ahead of its fundamentals.
Bitcoin last traded at $1071, down 12.2% since the China central bank news.
Below are some cool charts used in the report:
David Woo, FX and Rates Strategist at Bank of America Merrill Lynch, believes Bitcoin can become a major means of payment for e-commerce and could emerge as a serious competitor to traditional money transfer providers. As a medium of exchange, Bitcoin has clear potential for growth, according to the strategist. That said, his fair value analysis implies a maximum market capitalization of Bitcoin of $15 billion, or $1300. This is above current trading levels of $1052, but just fractionally above the all time high of $1242 set last week.
Commenting further on Bitcoin as a medium of exchange, Woo notes that since April 2013 significant investment was made into start-ups that develop and promote Bitcoin as a means of exchange for merchants (as opposed to speculation investment on the exchange). "For example, CoinLab has received seed money to incubate other Bitcoin start-ups like mining companies and exchanges," he highlights. "The most notable company to accept Bitcoins may be Baidu, a major Chinese portal, which began accepting Bitcoin for its online security services in October 2013."
The advantages of Bitcoin as a medium of exchange, according to the firm, are: Bitcoin is attractive as it offers low transaction costs; Bitcoin offers an attractive alternative to cash in terms of security, transparency of transactions, and counterfeiting; There is a finite supply of Bitcoins; Bitcoin's relative anonymity is advantageous to citizens of crisis countries; “Winner Takes All” market ensures that increasing acceptance and popularity of Bitcoin increases likelihood of success; Bitcoin offers large benefits (from an asset allocation perspective) given its negative correlation with risk sensitive assets, much like gold.
The disadvantages of Bitcoin as a medium of exchange, according to the firm, are: Bitcoin's role as a store of value is seriously compromised by its elevated price volatility; Regulators could try to impose controls that would increase the transaction costs for using Bitcoin despite its efficiency and the transparency relative to cash; The quality of Bitcoin exchange security, where consumers exchange dollars for Bitcoins (and vice versa) is suspect; Seigniorage is currently accruing to the “miners” of Bitcoins who have the fastest CPUs; A 50 minute wait before payment receipt confirmation is received will prohibit wider use; Bitcoin's use as an international currency will likely be hindered by the fact that it is not a legal tender.
Woo combats the notion that bitcoin will be used as a store of wealth for the black
market/underworld. "... the fact that all Bitcoin transactions are publically available and that every Bitcoin has a unique transaction history that cannot be altered may ultimately limit its use in the black market/underworld," he said.
On volatility, Woo said Bitcoin's role as a store of value can compromise its viability as a medium of exchange. "Its high volatility, a result of speculative activities, is hindering its general acceptance as a means of payments for on-line commerce," he said.
Commenting on if bitcoin is a bubble, the strategist said if one assume Bitcoin becomes (1) a major player in both e-commerce and money transfer and (2) a significant store of value with a reputation close to silver, their fair value analysis implies a maximum market capitalization of Bitcoin of $15bn (1BTC = 1300 USD). "This suggests that the 100 fold increase in Bitcoin prices this year is at risk of running ahead of its fundamentals," Woo said.
Digging deeper into the value of Bitcon, Woo doesn't offer a forecast but offers preliminary thoughts on how to approach the fair value question. With Bitcoin a medium of exchange as well as a store of value, he said it is easier to think about fair value by treating these two purposes separately. On the value of Bitcon as a medium of exchange, he sees the maximum market capitalization for Bitcoin’s as a medium of exchange at $5 billion for B2C e-commerce and $4.5 billion as means for payments, or a total of $9.5 billion. On a store of value, he sees the maximum market capitalization for Bitcoin's as a store of value of $5 billion. Adding them together he gets to approx. $15 billion, or $1300. All this said, Woo said this does not mean Bitcoin price cannot rise further (as an object of speculation) and thinks the recent rise of Bitcoin price could soon run ahead of its fundamentals.
Bitcoin last traded at $1071, down 12.2% since the China central bank news.
Below are some cool charts used in the report:
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