::  Posts  ::  RSS  ::  ◂◂RSS  ::  Contact

Bitcoin exchange rate as a prediction

November 11th, 2013
money, bitcoin  [html]

Bitcoin has a small chance of becoming a major way people handle money. There are 1.2 trillion dollars in circulation, so if bitcoin seriously succeeded the value of all coins might total around a trillion dollars. The long-term maximum number of bitcoins is 21 million, so each coin would be worth about $50K.

If we naively think of bitcoin as an all-or-nothing thing where it's only worth it if it gets huge, then we can interpret the current exchange rate of $360 as a prediction that bitcoin has around a 1% chance of making it. To figure out if this is a good way to think of it, let's consider the other likely outcomes for bitcoin.

Governments could pass laws or apply existing ones in ways that make bitcoin impractical to use or fully illegal. There is lots of interest, speculation, and growing experience with the legal aspects of a decentralized currency, and it's not at all clear yet how it will turn out. It might end up as just another currency, but it also might end up unusable.

There are also technological issues. So far the bitcoin cryptography and protocol seem solid, but occasionally things have gone wrong and there may be some incentive issues. If there's a deeper protocol flaw, or if the math behind the cryptography turns out to be more tractable than believed, we could end up in a case where bitcoins lose all their value. For example, if you could construct a private key for an address from its public key then there's no longer a way to tell whose money is whose and the whole thing would collapse.

Finally, governments could allow bitcoin on similar terms to cash, the technology could stand up to the challenge, but people still might not switch to it. Perhaps the volitility never gets low enough for people to be comfortable, it can't lose its associations of drugs and money laundering, or people really like being protected from fraud via chargebacks. It could fade away or end up with long term niche use by hobbyists and people with transactions too shady to use standard currency.

In each of these alternative outcomes bitcoin is either worthless or very small on a global scale. Most of the expected value of bitcoin does seem to come from this small chance that it will be very large, so I think the original naive calculation is about right. The market is estimating that bitcoin's probability of making it big is around the current price divided by $50,000, which is currently 0.7%. If you think this is too low or too high, you could make some expected money by correcting it.

Comment via: google plus, facebook

Recent posts on blogs I like:

How Fast New York Regional Rail Could Be Part 2

In my last post about New York regional rail schedules, I covered the New Haven and Harlem Lines of Metro-North and the Main Line and Hempstead Branch of the LIRR. I was hoping to cover more lines tonight, but due to time constraints only the Hudson Line …

via Pedestrian Observations October 17, 2019

Strong stances

I. The question of confidence Should one hold strong opinions? Some say yes. Some say that while it’s hard to tell, it tentatively seems pretty bad (probably). There are many pragmatically great upsides, and a couple of arguably unconscionable downsides. …

via Meteuphoric October 15, 2019

What do executives do, anyway?

An executive with 8,000 indirect reports and 2000 hours of work in a year can afford to spend, at most, 15 minutes per year per person in their reporting hierarchy... even if they work on nothing else. That job seems impossible. How can anyone make any im…

via apenwarr September 29, 2019

more     (via openring)

More Posts:


  ::  Posts  ::  RSS  ::  ◂◂RSS  ::  Contact