Bitcoins have been in news of late due to variety of reasons, for their legality/illegality, opening of an ATM, increasing value in US$ terms etc. This blog only to has a limited discussion on this movement ignoring the legality aspects and the mode of issuance. To understand the Bitcoin saga we need to understand the concept of 'MONEY'. What is Money?
It is nothing but a negotiable instrument, a note from the issuer who promises to pay the person who presents the note to the issuer the amount of a certain product (for want of better term) as stated in the note. During the gold standard days, the US Government used to guarantee that it shall pay the bearer of the US$ a certain amount of gold. Along with the promise, the free transfer-ability without any questions being raised on the trail of ownership of the note are the key features which led to the strong growth of the money being a preferred mode for exchanging goods and services.
As long as a currency issued by a person has the key features of its ability to be exchanged for goods/services and promise by the issuer to repay the bearer the agreed amount, any person can issue a currency. For example, royal families of Florence used to issue coins called 'florins' which were a form of currency. In the current post gold standard era, the concept of the issuer repaying the bearer a certain quantity of amount has lost its significance. However the need to be able to exchange it for goods and services is necessary. Hence their is a great need for an 'Exchange' for any currency to survive. In case of normal currency, people do the exchanges on a daily basis without any need for a third party to moderate between them. To a certain extent, foreign exchange bureaus play the role of the 'Exchange' converting local currency to foreign currency.
For Bitcoins to succeed till the time they become mainstream, the 'Exchange' needs to play an important and critical role as the success of Bitcoin is dependent on these. Hence maybe investment in the 'Exchange' may be a better bet as investment opportunity to an investor rather than holding onto Bitcoins. Revenue from the 'Bitcoin Exchange' would increase as the volumes increase however the price would fall as the transaction volumes increases. The reason for the high price of Bitcoins and recent run up could be the low volumes and high demand.
The total number of Bitcoins issued currently stand at 11,940,700. The daily volume for the top 5 exchanges on 30th Oct was 58,000 BTC i.e only ~0.5% of the total Bitcoins issued are being transacted across exchanges. As more and more transactions are recorded on the exchanges, the value of the Bitcoins will stabilize. Another key factor that will kick in as the Bitcoins transactions increase is the multiplier effect. The same Bitcoin could be transacted multiple times. This would also ensure that the availability of Bitcoins increases.
