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When I first heard about Bitcoin it was about $0.50, this was back in 2010 (if I recall correctly). I remember being in a meeting to discuss the path our student investment group would take in the coming year and a friend mentioned that a guy he lived with was interested in a new online currency called Bitcoin. I thought it was a cool idea but didn't quite see how it should work. Eventually I understood and then reasoned that it should increase in price but I didn't have any sort of price target in mind. Back then the cryptocurrency was even less well known and most of the activities seemed to be for illegal drugs... ok, that isn't quite true but the dark side felt more prominent than the legal uses. I should have invested, but didn't. I was talked out of it and now greatly regret not listening to my instinct.  In that time there have been many articles on the Financial Times, as well as the BBC, WSJ and the Guardian, and in the last week the US Government has almost agreed that Bitcoin is "legal" and that it wishes to figure out how to regulate the market. In this article I will consider mostly price history, with a nod to the dichotomy of price vs value, rather than regulation or trading BTC for goods.

More than 100x in 4 years

When I first wrote about Bitcoin on this website the price was $12, that was 4th October 2012. Wow! Now at almost $750 we've seen a price increase that beats what gold has done in a decade happen in less than a year. Of course, the question that everyone wants to answer: is it a bubble?

I can't tell you much about price but I can tell you about value. The price is what you pay, and to that extent the price will be whatever the market sets it to be. The current price isn't universal across all platforms either, so there isn't really one unique price. As the currency is decentralized and no platform has a monopoly (ok, some are a lot bigger than others) then there is not official exchange rate (perhaps by definition).

What about value? This is what you get.  The currency has been created with certain properties in mind that some people place great value in. The value is the functionality, and that says nothing about price. Bitcoin has a price of circa $750 per BTC (at time of writing), while Litecoin has a price of circa $8.5. A difference of almost 100 multiples. The prices of the two coins are quite different yet the functionality is almost identical. Prices are far different yet value is practically the same.

If you were to buy a plunger would you want to pay $10 or $100? Given that functionality is basically the same then you'd clearly opt for the cheaper. Oh, but there are some differences between the two. Most notably the (final) total supply of the two currencies differs by a factor of 4. So from looking at purely the supply fundamentals then you could be tempted to say that the two currencies should only differ by 4 times. Obviously this isn't the case so we then have to look at the demand side.

People are buying because they think the price will increase. The value (functionality) hasn't changed so then it is fairly obvious to conclude that people are now over-paying. I'm not saying that the price increase has ended. I really could not say with any confidence where the top of the market is, nor in what year the market will peak. With this paragraph I'm being slightly pejorative to the folks who invest rather than use the currency for trading (for goods).

Bubbles

Naturally, when people talk about bubbles it is always with reference to poor fundamentals or over-paying for something. Part of the bubble callers in Bitcoin are pointing to the supposed fact that Bitcoin has no value, the counter argument here is that it does have a (functional) value but it isn't as tangible a bar of gold or lump of steel. The benefits are purely digital and it seems that humans have a hard time valuing something which intangible and especially so if it is digital. Some folks see no point, or no value, in Bitcoin so in their reference frame it has been a bubble since the beginning.

I have to admit that I've been sceptical of the price at many different times yet the price still went higher. When it hit $30 I was thinking it was too high at that point but acknowledged that the price could hit $100 sometime far in the future. Well it hit $100 far faster than I thought possible and, again, I thought the price was too high and the price continued to rise. Along the way it has dropped but that's almost irrelevant (?) now.

I recall some traders laughing about Bitcoin when it had a massive drop sometime after the price hit $200. They called it a bubble, said the party was over, that price was going to zero, or that the government was going to shut it down. While some traders have shorted Bitcoin and made money at some point there is no way they have been shorting since $100. The only part they might be correct about is the bubble part, and by this I mean it with reference to the concept of manias. I've been wrong footed on the price of Bitcoin because it feels like a mania, despite the fact that I think the functionality is great, I believe the price has risen too far too fast. Too many greater fools.

TL;DR : Where does the price stop? I have no idea. When will it stop? Ditto.

Alternatives

As suggested above, there are alternatives to Bitcoin that have very similar functionality but the price is far cheaper. One has to scratch their head and ask: surely it makes sense to buy the cheaper "product"? The major cyrptocurrencies are showing some signs of correlation too, so it seems that if you bet on BTC going up then LTC should too. The ratio of BTC to LTC is obviously not fixed and at the moment this ratio is not near its all-time high. That is to say that Litecoin is not as expensive against Bitcoin as it once was.

Other alternatives include PPC (Peer Coin) and NMC (Namecoin). Both seem to be "serious" contenders as alternatives, they are 3rd and 4th most used cryptocurrency as I understand it. Both have similar functionality, as you would expect, but are not as expensive to buy. The ratios of these coins to Bitcoin (e.g. LTC/BTC, PPC/BTC) also looks favourable, they aren't hitting new all time highs.