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Wednesday, November 20, 2013

Bitcoin and Litecoin Bubble, November 2013

If you've been following Bitcoin and Litecoin at all, you'll have noticed a massive spike in pricing over the past couple of weeks. I wish I could say that I had called this one, but honestly: it's all just speculation. Plenty of people are patting themselves on the back for buying in at $150 or even $250 on Bitcoin, but if you read around you'll probably find the same people talking about how even $800 was a "great price" -- right before we dropped $200 to $300.

There's still a ton of turmoil in the prices, driven almost entirely by the rampant speculation. People are trying to guess if we're just pausing before another meteoric rise to $2000+, or if we're about ready to take another plunge into the <$200 range. My take: either is possible, short-term. Long-term, though, I'd be far more likely to bet on the increase in price of Bitcoin, and as the top Scrypt-based cryptocurrency, Litecoin as well. Here's why.

First, China has been going crazy, and there are a bunch of real businesses beginning to accept Bitcoin as legal payment. But the reasons for China and other places going crazy might have as much to do with the US government shutdown as anything, as the shutdown illustrated just how fragile our governments can be. If the US goes through hyper-inflation, Bitcoins could skyrocket in value relative to the USD -- and if the USD has serious issues, let me tell you, the rest of the world's currencies aren't going to be far behind, as most of them are at least significantly linked to the USD (in the short- to medium-term).

There are other factors at play as well. Silk Road, a site dealing with the trading of illegal goods (mostly drugs) was closed by the FBI earlier this year in a sting operation that seized a good chunk of BTC (potentially 500K). That caused a short-term panic, but overall the closing of an illegal business has established BTC as a tool with many legal uses.

We've also seen ASICs (Application Specific Integrated Circuits) start shipping in quantity, which has basically driven the difficulty of mining BTC up 200X or more just in 2013. That has killed off the potential for mining BTC with GPUs (all of my computers and GPUs would currently 0.125 BTC per month, with a power cost of $325 or so), but the ASIC pricing has dropped tremendously. The ASICMiner Block Erupter USB sticks for instance were priced at $300 early this year when they first showed up. Last month before this bubble they were even down below the $20 mark, and now with the price increase they're back at $40. Those little USB sticks can do around 330MHash/sec, while drawing less than 5W, leading to a net profit of $5 per month or so. At $20, I should have bought 50; at $40, I'm not so sure, but if the price does go up to into the five digit range and I just sat on all the coins, it would be a guaranteed win.

Let's go back to China for a moment, now that I've mentioned ASICs. With pricing of $40 for a USB stick in the US, it probably costs less than $5 to build one of those over in China. Imagine a bunch of people using ASIC miners in China to get BTC to pay for their Internet service and whatever else, which is very likely already happening. How many Bitcoins does China need to support such services? There are 1.4 billion Chinese, so if each of them happened to hold $100 worth of Bitcoin for purchases, Bitcoin would need at a minimum a market capitalization of $140 billion.

For those that aren't familiar with Bitcoin, there will only be 21 million BTC ever created -- it's part of the design of the currency. Right now, there are roughly 12 million BTC in existence, so a bit more than half of the total. If BTC needed to have a market capital of $12 billion, then each coin would need to be worth $1000; for the capital to reach the $140 billion above, right now we'd need to have coins worth roughly $12,000 each!

Pie in the sky? I thought so too a while back. If I had been a bit more daring, I wouldn't have sold most of the coins I mined prior to the start of 2013 (around 1000BTC). My total costs for mining all of those coins, including power and computer hardware, are around $8000, and I've more than covered that now. But, could you imagine if I had saved them all? I'd have over half a million -- enough to pay for my house and another just like it, plus plenty of other items as well. Of course, if BTC tanked and disappeared, I'd have $8000 in additional debt (expenses) to deal with.

We've now been through this bubble mania three times. The first bubble in May/June 2011 peaked at just over $30, and it was followed by BTC dipping all the way to just under $2. At one point, I had computers that were mining over 5 BTC per day, but my power costs were roughly equal to the value in BTC and I covered those in the interest of being "better safe than sorry". Then in the buildup to April of this year, when we hit $266 or so, we had a crash back to $60. Now we've spiked as high as $900 and have fallen back as low as $450. Perhaps we'll continue down until we're in the $200 range, but there's still an upward trend.

The LTC side has been a bit less chaotic, but it's still interesting. There was a massive bubble in May 2013 where LTC hit roughly $6 before falling into the $2 range, with a dip even into the $1.25 range (when Silk Road was shut down). Last week it spiked up to nearly $10 and it's now down in the $7 range. How many Litecoin have I mined, just since April or so? Over 1600, which if I had kept them all would now be worth over $11,000. I could have purchased four mining rigs in April for around $6000 and already have double my "investment" -- but again, I got a bit scared with those $1.50 coins and panicked.

Now, after several hard lessons, I think I might be seeing the way forward with more clarity. It's time to stop selling coins when we look to the long-term. Short-term is still a guess, but if you're willing to take a chance, I wouldn't be surprised if right now is merely a short-term pull-back before we see another substantial jump in value. In fact, I'd bet heavily that before the end of the year we'll see $1000 BTC, if only for a few of the big investors to say, "I told you so." Litecoin usually stabilizes around 0.012-0.025 BTC, so if that holds we might see LTC go as high as $25 before 2014 rolls around. I sure hope it does, because when I'm sitting on a few hundred LTC in 2014 I suspect I'm going to be looking pretty darn smart.

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