Is there a BitCoin bubble?

Tim Lee writes about the BitCoin bubble, where he argues that demand for BitCoin represents a bubble that will, like most bubbles, pop.

While I’m still skeptical that BitCoin will ever be a serious currency, I don’t think it’s likely that there’s a bubble, at least not yet. Currently, BitCoins are trading at around $1.15 each on the exchanges that convert BTC and USD. And since there are just under six million BitCoins currently in existence (the number of coins “mined” in BitCoin parlance), that means the BitCoin economy is somewhere in the $7 million range. By 2140, the last BitCoins will be mined and the total number of BitCoins in existence will level out at about 21 million. Based on the current exchange rate, that’s somewhere around a $25 million economy.

I don’t see how this represents a bubble. Given current American macroeconomic policy, you’ll be lucky if you can buy a haircut for $25 million in 2140. And $7 million in 2011 is still pretty insignificant; it’s less than the budget deficit of Las Vegas. If a bubble existed, we’d be talking about the world of BitCoin being valued in the billion or tens of billions of dollars.

Plus, unlike dot-com shares or houses or tulips, the supply of BitCoins is fixed (though I look forward to seeing Tim’s thoughts on this tomorrow). About 30% of the total BitCoins ever to be mined already exist, and we know pretty much what the trajectory looks like over the next 130 years. This is as stable a supply as can exist, which makes it easier for markets to equilibriate. And to the extent a bubble does develop, it will likely be more a reaction of holders of US dollars to the fear of future inflation.

Finally, even if BitCoin remains a tiny, niche currency — so what? The costs of converting USD and BTC are negligible. As long as some sites and people take BitCoins, the currency can thrive. Think of PayPal. Now, certainly, PayPal accounts are denominated in dollars and Euros and sterling and other real-world currency. But I can’t send PayPal money to just anyone. Restaurants and meatspace retailers generally don’t take it. Many if not most people won’t take it. I can’t pay my doctor or my mechanic with PayPal money. But because I can make many transactions with it — and freely convert my PayPal dollars with dollars in my bank account — it’s still useful to me. BitCoins can play the same role with the feature not bug of having no central bank inflating their value and being exchangeable with traditional currencies.

So in short, while I doubt we’ll still know the name BitCoin in a decade, I’m not convinced that there’s any irrational exuberance inflating the value of BitCoins to unsupportable levels.

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