Bitcoin Rallies on Strong Fundamentals

Hi Everyone,

This week the rally has continued but slowed with bitcoin trading between $630/BTC and $680/BTC.  The calm trend up was punctuated with a few intermittent mini-spikes and mini-crashes.  Currently bitcoin is trading at around $650/BTC.

The rally this week could be attributed to a number of factors.
  • Apple lifted its ban on bitcoin apps.
  • ECB takes deposit rate negative in a historic move:  No mention of QE but some suggest that the option is on the table.  On the ECB announcement, bitcoin jumped about $15: 
  • As per a conversation I had with a friend, Pantera Capital may be been converting their $147M (as per their Dec filing) fund into bitcoin.  This may have even started during the three weeks of stability at $450 or even earlier.
In other news:
  • Erik Voorhees reached a settlement with the SEC to pay a little over $50k on charges of selling unregistered securities with his virtual IPO of SatoshiDICE (bitcoin gambling) and FeedZeBirds for bitcoins:  Last July, SatoshiDICE was sold for 126,315 BTC or $12.4mm at the time.  I remember that on the day of that announcement, bitcoin markets tanked on the anticipation of SatoshiDICE investors selling some portion of their coins once they got their distribution from the sale.  I also remember that two weeks later when the coins from the sale were actually distributed, the markets fell some more.  In any case, SatoshiDICE was the first of its kind in that it was the first provably-fair bitcoin gambling site and it paved the way for future provably-fair gambling sites like Just-Dice (On a side note, Just-Dice allows investors to stake the house and get 90% of the house's winnings. The house edge is 1% so investors have an expected return of .9% for every time the house bank is turned over.  In the past year, investors have made 42.65% returns on top of bitcoin appreciation).
  • VC money continues to pour into the bitcoin space
  • Facebook approves cryptocurrency tipping apps:
  • IRS says no FBAR reporting needed for bitcoin:
  • Bitcoin provides incentive to crack time-release encryption:  Time-release encryption is basically purposefully crackable encryption that takes some predetermined effort/time.  At a high level, the encryptor calculates parallel hash chains using his multiple cores (e.g. 16 cores => 16 chains of SHA-256 hashing each with 2 trillion nodes).  He then obfuscates the chains such that the end of one chain is required for starting on the next chain.  This way, although he computes the chains in parallel, the decrypt must compute them in serial (i.e. it takes the encryptor 1 day to make a cryptographic problem that takes others 16 days to crack).  He buries the private key to a bitcoin address in the final node of the final chain.  So now whoever cracks his cryptographic problem gets the bitcoins.  Then he ties the secret he wants to time-release to the bitcoins' public key in such a way that should anyone find the private key and claim their loot, the secret is revealed.  This entire mechanism benefits from integrating bitcoin in this way because it gives people incentive to actually crack your puzzle so that your secret gets revealed on time.  Without bitcoin you could guarantee that a secret would take AT LEAST x amount of time to release but you had no guarantee that anyone would work on your puzzle to release the secret as fast as possible so there was no upper bound on how much time it would take for the secret to actually be released.

I read a study recently which compares the social, economic, and environmental costs of bitcoin with the gold and fiat money systems (  It looks at the costs of gold mining/recycling (including worker deaths), printing/minting paper/coin money, bitcoin mining, banking industry maintenance (ATMs, electricity, etc.), and more. The author finds that relative to the gold and fiat money systems, the bitcoin protocol's costs in the three categories of social, economic, and environmental are negligible, .11%, and .275%, respectively.  This supports my intuition that the benefits, rather than the costs, of bitcoin are likely to be the drivers of its viability since the costs are orders of magnitude too small by comparison to bind as a constraint worth considering (as an aside, the costs of automated, digital systems are naturally lower than physical systems; just avoiding the need for physical transport and human labor/administration saves big).  If you buy that argument and the argument that systems which are massively more efficient than incumbent systems ultimately win out (that major improvements in efficiency can attack and beat established network effects), we can take it farther and claim that, benchmarked to absolute fiat terms, it might still be profitable in the long run to mine bitcoin now at a loss.  But of course, at that point, you might as well just buy bitcoin instead.  To put it more clearly, if the net world benefits of bitcoin are greater or of the same magnitude as established forms of currency AND the net world costs of bitcoin are orders of magnitude less than established forms of currency AND in the human journey toward technological advancement, massively more efficient systems do succeed in replacing incumbent systems (even those with very strong network effects), THEN bitcoin could be severely undervalued.  Even though the argument is bit nebulous (it doesn't address how the adoption/transition actually happens), I think there's something there.

Kevin & Team Buttercoin
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