There has been an enormous amount of hype regarding the relatively new digital currency called Bitcoins recently, you can use bitcoin to buy a lot of stuff, like the Baby Trend Range Jogging Stroller. While there are some valid arguments against using bitcoin as a currency, it appears that there is an opportunity to cash in on the hype via a completely speculative investment. In fact, the vast majority of people pouring real money into bitcoin at the moment are doing so not because they actually want to purchase goods, but because they are hoping for a rise in value of the currency itself. I am generally quite conservative, but must admit that this does intrigue me. Usually by the time the masses get on board however it’s usually too late. My goal today is to attempt to determine just how much more room for growth still exists in bitcoin.
Bitcoin’s Wild Ride
Bitcoin was created back in 2009, and as recently as 2010, were only worth about 6 cents each. As more and more people came on board however, there has been a meteoric rise in value. By mid-2011 a single bitcoin was worth $35, a whopping 58,000% gain over just a year prior. A $10,000 investment in 2010 would have been worth nearly $6 million! The market subsequently crashed however, and by the end of the year bitcoins were trading back in the $2 – $3 range. There has been steady growth until the past few months. Recently there has been another exponential rise in value, this time reaching a peak of $266 before crashing once again to the $50 range. It has subsequently bounced back a bit, and at the time of this writing was valued at $121.
There are currently a total of 11,047,375 coins in circulation. Over the past 30 days the market capitalization has ranged from a low of $551 million to 2,927 million. To determine whether we’ve already seen the all-time peak, as some are claiming let’s do some calculations. As with any market, the laws of supply and demand dictate the price. My hypothesis is that there are still very few people that are actually buying bitcoins in relation to the total number of people who want to and are able to. It’s still relatively complex to open an account, create (and protect) a wallet, and wire money to Japan to initiate a trade. I think this process will get easier over time which will open up the market to more and more participants. Let’s look at the numbers to see if my theory has any credibility.
How many Bitcoin Investors are there?
Due to the anonymous nature of bitcoin transactions, it’s impossible to determine how many people are already actively trading. What we do have access to however is the number of bitcoin transactions over time. Blockchain for example is an excellent resource for bitcoin graphs and statistics. The following graph shows the number of transactions over the past year:
The number is quite volatile, but when smoothed out we see that growth has actually been somewhat linear. The average number of transactions per day has been increasing by about 4,700 every month. Based on a current daily transaction volume of around 55,000/day, we are currently seeing a growth rate of about 11%/month in the number of transactions. Over the past year we’ve seen a 700% increase in the number of transactions per day and over the same period we’ve seen about a 2,000% increase in market value.
Let’s say the average user makes a single transaction every 10 days. This would put the total number of active investors at about 550,000 people. This completely ignores the thousands of “users” who are actually bitcoin miners, merchants, etc. but these will become more insignificant over time. 550,000 people is very small in the big scheme of things — only about 0.01% of the world population, and about 0.05% of the westernized world.