The PolyCapitalist's New Bitcoin Price Target Is...

As regular TPC readers will know I'm rather fond of alternative currencies like Bitcoin, the Little Virtual Currency that Could.

And so too now is the U.S. Treasury Department's Financial Crimes Enforcement Network, or FinCen.

As the above linked-to WSJ article notes the exchange rate for Bitcoin has been on a tear of late, with the currency trading up 57% during this week alone.

The recent runup in Bitcoin's price has apparently been driven by events in the Eurozone, as well as the additional credibility conferred on the currency now that FinCin has officially acknowledged its interest in virtual currencies like Bitcoin and outlined its criminal enforcement plans. If you're long Bitcoin getting the Fed's attention is apparently a good thing (at least in the short-term).

Now, naturally, readers of blogs like this one have one big question on their minds: where is the price of Bitcoin heading next? 

For the answer to that question I'll turn this post over to the brand new PolyCapitalist Research Department (PCRD), which is my crack team of ambitious research quants. All male 20-somethings straight out of the best schools. Take it away, PCRD!

PCRD: Thank you, TPC. We are very pleased to announce that we are initiating research coverage of Bitcoin with an opening price target of....

TPC: Now, now wait just a minute, hold on there PCRD. As the head of this blog I feel we have a responsibility to our readers. So before you guys go out and announce a price target maybe we should first discuss how you went about valuing Bitcoin?

PCRD: We're so glad you asked us that, TPC, as we put a lot of work into this. First, we developed a rich quantitative data set. For example, we researched what a Bitcoin can buy in the real world and what those items cost in traditional currencies such as U.S. dollars. We also looked at what if any exchange rate conversion expenses exist. And so on.

TPC: That sounds like an excellent start. What else did you do to determine the proper price of a Bitcoin?

PCRD: We next built a rather detailed MS Excel model which factored in other data, such as price trends, liquidity analysis, and other temporal factors.

TPC: Excellent. Did you perform any further analysis?

PCRD: Yes we did. We also stress tested our model by running several different scenarios based around Black Swan type events. For example, we ran a Monte Carlo simulation on the impact to Bitcoin's exchange rate with the euro if Cyprus left the Eurozone.

TPC: Or a Black Swan 'outlier' like another Bitcoin market crash?

Pin-up found in the PCRD cubicles

PCRD: Uh, right!

TPC: Ok, great. So I'm dying to know what price target you guys came up with for Bitcoin?

PCRD: Well, as robust as our modeling was we decided to scrap what the spreadsheet told us and just use the price target set by the guys over at bitcointalk.org. They seem have a better feel for Bitcoin's momentum and how this market is going to play out. They also seem like real stand-up fellas, and they even refer to their "Bitcoin exit strategies".

TPC: Got it. Yeah. Um. Guys, I really appreciate all the work you have been doing but I think we're going hold off on setting a Bitcoin price target for now. Better yet, I think we're just going to close down the entire PCRD.

Adventures in Alternative Currencies: Bitcoin Goes Mainstream

Continuing on with our series covering adventures in alternative currencies, many were quick to proclaim the death of Bitcoin, particularly following the June 2011 bursting of the Bitcoin bubble. For example, here is some doomsaying from the normally reliable Tyler Cowen; and for a pessimistic economic historian's take see here.

But following an undeniably rocky road the little digital currency that could appears to be having the last laugh. A good read can be found here on how Bitcoin is beginning to go mainstream.

At this stage the obvious first question is why has the decentralized, 100% digital currency proven so resilient? Scientific American provides one good answer:

When they (a merchant) finalize a deal in Bitcoin, they do so knowing that the transaction can never be reversed. The Bitcoin network doesn't edit its ledger. As such, merchants no longer have to worry whether they are charging a stolen credit card. 

"'The fraud mitigation is big for Internet merchants, because they are all handling card-not-present transactions. And the business has to eat the loss if the payment is reversed later on,"' Gallippi says. "'Using Bitcoin, a business can receive a payment from any country on the planet, instantly, with no risk of fraud."'

In addition to helping cut down on fraud costs for merchants, Bitcoin is chic. Using Bitcoins to transact business is a mark of digital savvy for both tecno hipsters and the merchants who cater to them.

What the future ultimately holds for Bitcoin is less interesting to me than a more general issue, which is the apparent growing trend in alternative currencies coming into existence.

We have already seen some Congressional saber rattling about Bitcoin prior to its flash crash. Will governments continue to tolerate it, Bristol's new pound note, etc., while they remain small? Or will we see a more formal move in the not too distant future to stamp out these fledgling alternatives to government fiat money? As the article points out, government's might have a hard time shutting down Bitcoin:

But perhaps most consequential for the future of Bitcoin—in order to shut down a peer-to-peer currency exchange, one would have to terminate every node on the network. The few lawyers who have studied Bitcoin all agree that the currency inhabits a legal gray area. No one really knows how governments would react if it gains traction, but many consider the exchanges to be the easiest target for people who want to regulate Bitcoin. Decentralizing the exchanges would make that job nearly impossible. Bitcoin developers are quickly proving that they can design decentralized alternatives to even the most sophisticated financial institutions. 

Recommended links & Photo of the Week

Coming soon to a Eurozone bank near you?

1. Beware of falling masonry (Economist) Good tactical overview of the eurozone crisis and some of the options being considered. See also 'Banks Build Contingency for Breakup of the Euro' (NYT)

2. Latvian bank Krajbanka set to be wound up (AFP) Above bank run image is of Krajbanka.

3. The Rise and Fall of Bitcoin (Wired) Contrary to the title I don't think this is the last we've heard of Bitcoin, or other virtual currencies, but an interesting and informative read nonetheless.

4. Prepare for riots in euro collapse, UK Foreign Office warns (Telegraph)

5. Why Not Break-Up Citigroup? (Simon Johnson) Citibank has blown-up and required a bailout three times in the last three decades, or once on average every ten years.

6. How could Reebok sell trainers for $1? (BBC) Contrary to popular believe it's not all glum news here at TPC. I was able to see the remarkable Nobel Peace Prize winner Professor Muhammad Yunus speak this week (video below). His bank, Grameen, is doing amazing things and gets a BHAG nod.

7. MF’s Missing Money Makes You Wonder About Goldman (Jonathan Weil)