Bitcoin is starting to garner attention from some of Wall Street’s top currency strategists.
Today, David Woo, global head of rates and currencies research at BofA Merrill Lynch, published the bank’s first report on the digital currency.
“We believe Bitcoin can become a major means of payment for e-commerce and may emerge as a serious competitor to traditional money transfer providers,” says Woo. “Assuming 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, our fair value analysis implies a maximum market capitalisation of Bitcoin of $US15bn (1BTC = 1300 USD).”
Steven Englander, global head of G-10 FX strategy at Citi, has also been mulling over Bitcoin’s prospects.
“I am trying to find a framework for analysing Bitcoin and whether it can be seen as a currency,” writes Englander in a note to clients this morning. “I am still struggling for reasons that will be apparent below, but it seems to me that the developers can limited the supply of Bitcoins but they cannot limit the supply of Bitcoin-like assets that use a similar technology and have similar characteristics. We are likely to end up with a lot of Bitcoin lookalikes with little to choose between them, so pricing becomes very difficult.”
Englander expands on this idea in the note:
Unlike fine art, Bitcoin can be replicated exactly or close to it. Say in response to overwhelming demand for Bitcoin, someone created Nitcoin with similar properties except that mining a Nitcoin was twice as hard, and someone else (the Fed perhaps) created Gitcoin that could be mined at a fraction of the cost. You could argue that the relative exchange rates would be driven by the marginal costs of production at any point in time, although the volatility of Bitcoin so far suggests that the speculative motive dominates marginal production costs as a driver of price. My conjecture is that we will see big speculative swings as different ‘coins’ are created and move in and out of fashion and some emerging concern that there is nothing to anchor them and nothing to stop their proliferation. At the end of the day, it seems to me that if they lose their anonymity and portability advantage, the difficulties in fundamental price determination will cause them to lose their attractiveness.
You may ask why this is different from the dollar or any other currency. The answer is that in the US you have to accept a dollar as payment for goods and services, whereas you do not have to accept a Bitcoin, and certainly not 15 Bitcoin lookalikes. The combination of legal tender status and supply anchors the value of dollars in transactions in a way that Bitcoin will never be anchored. The dollar is legal tender by decree and in the long-term the current appeal of Bitcoin as being outside the Government will end up as a disadvantage rather than advantage, if there is no way to choose among Bitcoin alternatives.
Englander acknowledges Bitcoin’s early success, but he remains unconvinced that it can continue.
“As of now, the Bitcoin has no real competition and the fascination part is immense,” he says. “It is not disadvantaged by the lack of yield, since no G4 currency really pays one either. I am still sceptical, as it would seemingly be easy to launch an alternative.”
In fact, at least 54 Bitcoin clones have sprung up in recent months, and many of them are soaring in value.
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