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Bitcoin Price Target $400, by Henry Blodget

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Someone made a fortune in Bitcoin trading as it hit $145 overnight.

Henry Blodget writes about the Bitcoin bubble:

If I were going to put a price target on Bitcoin, I would think that $400 would be a perfectly reasonable target.

Unfortunately, so would $1,000.

Or $2,000.

Or $5,000.

And, because you're probably already getting ready to blast me for "irresponsibly fueling speculation," so would $0.

That's right: $0.



If the government comes in and declares Bitcoin illegal, or if someone figures out how to hack or counterfeit Bitcoin, or if Bitcoin speculators suddenly wake up one morning and collectively panic, Bitcoin prices will plummet. And there will no "fundamentals" for the value of Bitcoins to fall back on.

That's something to keep in mind as you watch the Bitcoin frenzy build.

A couple of days ago, I called Bitcoin the "perfect bubble."

What I meant is that Bitcoin has all the elements required to become a massive speculative bubble...along with the additional attribute of not being constrained by any "fundamental" value whatsoever.

Specifically, Bitcoin has:

  • A good underlying story. If you don't know why some intelligent folks are excited about the Bitcoin concept, you should take the time to understand. Bitcoin is a new form of currency that is accepted worldwide and can never be debased by politicians trying to get re-elected or countries trying to pay off huge debts. In a world in which the value of paper money is constantly ravaged by inflation, that's a very attractive attribute. Also, the world is very much ready for a "global" currency--a currency that all things in all countries can be denominated in. Bitcoin satisfies that need, too. And barring hacks, etc., it's safer and easier than carrying around sacks of cash. And so on.
  • A sexy "new-ness" that requires some work to understand. Right now, some smart people have analyzed Bitcoin and found it compelling and fascinating. Most normal people, however--to the extent that they've even heard of Bitcoin--assume it's just a silly speculative plaything. As more of the Great Dismissive Majority understand that there's actually something to Bitcoin, at least in theory, the more demand for the currency will increase.
  • A small and finite supply. The whole premise of Bitcoin is that only a finite amount of it will ever be created. This is in stark contrast to standard currencies, the supply of which is continually increased. The more people want Bitcoin, therefore, the more its value should rise. It's simple supply and demand.
  • A fundamental "value" that is highly subjective and, therefore, justifiable at almost any level. How much is Bitcoin really worth? No one knows. Depending on the assumptions you make, you can justify almost any value. When it comes to persuading people that they should feel okay buying something for more than it used to be worth, that's a helpful quality.
  • A high level of risk and excitement associated with trading it. The main reason Bitcoin is captivating everyone's attention right now is that the price of Bitcoin continues to explode higher. You don't have to be George Soros to know that what goes up can also go down, and the fact that Bitcoin's value could crash at any second makes "playing" it exciting. This risk also makes people feel smart for playing it and winning--which most people who are playing Bitcoin right now are doing.

So Bitcoin has everything it needs to become a major speculative bubble.

But the difference between Bitcoin and, say, the 1990s Internet bubble, is that there really is no fundamental way to value Bitcoin.

In theory, the fundamental value of a stock is "the present value of future cash flows" that the company will produce. The $400 target I put on Amazon in 1998, for example, was based in part on long-term revenue and profit projections for the company.

But Bitcoin does not generate any cash flows.

The only "cash" that Bitcoin will generate in the future is cash that comes from someone who buys it from you (or accepts it as payment for something).

So the "fundamental" value of Bitcoin can only be estimated the same way the fundamental value of, say, gold, can be estimated--which is guessing at what someone will be willing to pay for it at some time in the future.

That attribute creates more risk for Bitcoin speculators. But it also creates more potential upside. Because there is nothing to constrain the price of Bitcoins other than what other people are willing to pay for it.

Another thing to keep in mind about asset bubbles is that the big ones take years to develop and hit their peaks.

The dotcom stocks, for example, were dismissed as a "bubble" way back in 1995...a full five years before the peak.

The housing market was called a bubble in 2003 and 2004, many years before prices peaked.

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Henry Blodget has an update with Bitcoin at $235:

Those who are trading Bitcoins — and, more importantly, owning Bitcoins — are making money hand over fist.

And here's what the latter folks understand that the those who are huffing about "Bitcoin bubbles" don't:

The most you can lose if Bitcoins go to zero is 100% of your money.

The most you can make, meanwhile ...

Well, no one knows exactly how much you can make.

But it's probably a lot more than 100%.

Those who bought Bitcoins in early March, for example, have now made 7X their money — a return of nearly 600%.

That's a pretty nice return.

And it's a return that more than justifies the risk that these speculators took when they bought their Bitcoins for $35 — namely that the price of Bitcoins could go to zero.

All the speculators would have lost if Bitcoins went to zero was the value of their bet.

And now here they are, six weeks later, sitting on profits of 7X their bets.

In other words, for anyone who realized that it was possible that Bitcoins might trade at $235 in relatively short order, it was a no-brainer to buy them for $35.

Bubble or no, a wise speculator would take that bet every day.

And how about now?

Are Bitcoins a good bet at $235?

Well, let's run through the possible outcomes.

Bitcoins could certainly plunge suddenly from $235 to zero.

If they did that, you would lose 100% of your bet.

But ...

Bitcoins could also easily go to $2,350 — or higher.

(Bitcoins are impossible to value, but there are, and theoretically always will be, a finite number of them. Meanwhile, as Bitcoin prices rise, more and more people want them. And there are sound conceptual reasons why an electronic currency like Bitcoin is a good idea — one whose time has come. So it is possible that the "equilibrium" for Bitcoin prices, to the extent that there will ever be an equilibrium, is vastly higher than where Bitcoins are trading today. If you don't believe this, please read this article, which discusses it in more detail.) 

If Bitcoins go to $2,350, then that would be a 10X return.

So that's one possible betting scenario:

If you lose your bet, you lose 100%.

If you win your bet, you make 1000%.

That's a good bet.

Now, you may think there is no conceivable way that Bitcoin prices could ever hit $2,350.

And you might be right.

But ask yourself this question:

When Bitcoins were trading for $35 six weeks ago, did you think there was a chance that they would ever hit $235?

If you're like most people, you didn't.

If you're like most people, you either had no idea what Bitcoins even were ... or you cackled smugly about how Bitcoin was obviously a bubble and that all of the idiots stupid enough to buy Bitcoin would lose their shirts.

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