Reflections on Bitcoin – 7

Posted by John Patrick on

Bitcoins in a Jar

The value of a Bitcoin is up approximately 50% from recent lows. Does this mean just a spike among speculators, or does it reflect increasing belief in the fundamentals as described here numerous times? I see coinbase.com as a proxy for the future of Bitcoin. The  company is based in San Francisco, California and claims to support 1,300,000 consumer wallets and 32,000 merchants. Coinbase continues to hire bright young people and build out their infrastructure to support the merchants and digital wallets for consumers. It took years for the entire infrastructure of the web to be built out sufficiently to enable e-commerce. Likewise, Bitcoin has a lot of holes, but they are beginning to be filled. Coinbase recently announced a merchant refund capability so that consumers who return something purchased with Bitcoin can get a Bitcoin refund. Various apps are coming online to support merchants and digital wallets.

One significant accomplishment was announced this week – that DISH will begin accepting Bitcoin through the coinbase platform in payment for its pay-TV service beginning at the end of September. The CEO of DISH said they want to offer choice in payment methods for their customers. I believe that is true, but not altruistic. To the extent that consumers pay with Bitcoin instead of a credit card, DISH will save a lot of fees. Meanwhile, consumer digital wallets continue the expansion beyond 1 million. The coibase promotion described earlier has attracted 20,000 students in two weeks. One could argue that the pedigree of universities that are leading the pack says something. The top 10 schools include e the University of Michigan, Berkeley, University of Texas, UC Davis, NYU, UCLA, and Staford. (It is interesting to note that MIT, where the promotional idea had its origins, has fallen off of the top 10 list).

Will the value of the Bitcoin continue to go higher? Many years ago my father said, with regard to investment advice, “don’t give any and don’t take any”. As I have said a number of times, Bitcoin may go the way of Napster, but notwithstanding the possibility of major anti-cryptocurrency actions by governments, I remain optimistic. The Bitcoin protocols limit the supply of new Bitcoin to 250 every 10 minutes. The ultimate limit is 21 million (currently at 12.8 million). Another way to think about it is that Bitcoin has a limited supply. As the number of digital wallets and merchants continues to grow, the demand for Bitcoin logically would increase, and with the limited supply, that means to me that the price of a Bitcoin will increase.

My own Bitcoin strategy is twofold. First, I purchase $100 worth of Bitcoin every Monday morning at coinbase.com. The dollar-cost-averaging approach has worked well so far. I purchased some at more than $800 and some at ess than $400 with an average cost of approximately $600. The second part of my strategy is to be a Bitcoin minor. Rather than purchase the required specialized crypto-optimized hardware, I use Cloudhashing.com. Since April 7, I have mined approximately 2/10 of a Bitcoin. I reinvest 30% of the proceeds in acquiring additional mining capacity and now have approximately 5.5 gigahash/sec of mining capacity. The competitor to cloudhashing.com is the price of Bitcoin – if Bitcoin falls, cloudhashing is not asdesirable desirable. If the value of Bitcoin rises, the mined Bitcoin becomes more valuable. Time will tell. I am not putting my retirement savings in Bitcoin, but I am making an investment to put some money where my mouth is. I see it as analogous to investing in Cisco, Amazon, eBay, Google, and others in the early days of the web.

Warning: Please be careful with your money. When sending money to an exchange or seller you are trusting that the operator will not abscond with your funds and that the operator maintains secure systems that protect against theft — internal or external. It is recommended that you obtain the real-world identity of the operator and ensure that sufficient recourse is available. Because Bitcoin services are not highly regulated a service can continue operating even when it is widely believed that it is insecure or dishonest and webpages recommending them (including these) may not be regularly updated. Exchanging or storing significant amounts of funds with third-parties is not recommended.

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