Bitcoin Money

Bitcoin Ends Month Up 22%, Quarter Up 85%, YTD 2012 Now Up 162%

For the seventh month in a row, the BTC/USD exchange rate ended higher than the level it was at when the month had begun.  

For the month of September, 2012 the closing price of $12.40 USD was more than two dollars above the previous month’s close giving a 22% gain for the month. The second quarter had closed at $6.69 so the closing price for Q3 2012 shows a gain of 85%. For 2012, where the price opened at a $4.72 level, the price rise from January 1st now exceeds 162%.

Looking just at the exchange rate it might be concluded that BItcoin just came off another incredible month with many positive developments.  However that would not describe all that happened with Bitcoin in the past month.

Starting the month off on the wrong foot was the security breach at the U.S. exchange BitFloor in which 24,000 bitcoins were heisted.  This shuttered the exchange for several weeks before it eventually reopened however there still is no resolution giving access to the BTC funds that its customers held before the breach.

Another unfortunate development came from the apparent hoax in which Presidential candidate Mitt Romney’s personal tax returns were to be publicly released unless a large bitcoin payment was made.  Not only did this allow the media to portray Bitcoin in a bad light, the Secret Service  is now well aware of Bitcoin. [Photo source: Jim Cole/AP edited]

That wasn’t the only interest in Bitcoin from the U.S. government this past month.  It appears that the Securities and Exchange Commission (SEC) is interested in a particular high-yield investment program (HYIP) which named itself Bitcoin Savings & Trust and has recently defaulted on its obligations.  Additionally, Federal Reserve staff are now in possession of bitcoins, thanks to BitInstant.

For those using bitcoins in commerce, these developments are for the most part insignificant.  It takes a situation like what is occurring in the UK before the wind is taken from Bitcoin’s sails.  In late August, Intersango — which operates what at one time was the leading BTC/GBP market, was shut out of its UK bank and to-date still has no ETA as to when it can once again serve its UK customers.  Then in September the only other exchange with a BTC/GBP market, Mt. Gox, lost access to its account at UK bank Barclays.  Mt. Gox too has not provided an ETA when it might be able to resume service and reports that Barclays no longer is responding to information requests from the exchange.

Fortunately, two new methods for acquiring Bitcoins from the UK have emerged, just in a nick of time.  UK users of BlockChain.info/wallet can use Pingit, from Barclays coincidentally, to transfer funds to be used for the purchase of bitcoins.  Also, BitInstant has quietly made available its online bank transfer method which supports domestic GBP transfers within the UK.

So even with these developments, why might the exchange rate be still rising?

Block 210,000

Late next month, the block reward subsidy that mining operators receive will drop by half — from 50 BTC per block to just 25 BTC.  This is the first time a subsidy drop will occur but is an event that will recur about once every four years. This subsidy drop is how Bitcoin’s issuance slows over time and eventually reaches its maximum of just under 21 million BTC issued in total more than a century from now.

At the moment the drop occurs (expected around November 30th) the rate of currency inflation will drop from a 25% per-year level to just 12.5%. This is known in advance, however, and may result in speculators accumulating bitcoins now.  This would help to explain the currency’s rising exchange rate even in the face of negative developments.

Mining

The 234,750 bitcoins issued which Bitcoin miners took in during the month is valued at $2.71 million using the average daily valuation for the month of $11.55.

The block subsidy drop won’t be the only concern impacting mining operators.  While a rising exchange rate helps to take the sting off the loss in bitcoins that will be produced each day, that exchange rate gain is countered by a rising difficulty rate.

The higher exchange rate was nearly matched exactly by the rising difficulty, thus mining profitability remained flat over the month though it remains at levels that keeps happy even those mining with power-hungry GPUs.

They might as well enjoy it now because it appears that one or more manufacturers of ASIC designs are getting closer to production.  Butterfly Labs (BFL), possibly the first of five manufacturers out of the gate, not only isn’t retreating from its initial performance claims, it just increased them by 50% — essentially a free upgrade to those who have prepaid for their orders.

If the block subsidy drop weren’t enough to kill off GPU mining, delivery of the order backlog from just one of these ASIC manufacturers will be enough to finish the job.

Don’t Jump!

While these developments certainly are depressing to some, there are so many positive developments occurring and even much more to look forward to in the future.

In the past month, Bitcoin received more than its share of attention as an alternative to precious metals.  This will come as no surprise to BitcoinTalk forum user Cypherdoc who earlier this year wrote that he believes “gold/silver is a relic of the past and Bitcoin will assume its place as a new standard”.  In September, we heard from Digital Gold Currency (DGC) Magazine’s Julia who believes Bitcoin “opens the door” for alternatives to fiat — a sentiment echoed by GoldMoney founder James Turk.  Also receiving wide exposure was an interview with RunToGold founder and Bitcoin advocate Trace Mayer.

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While goldbugs and silver stackers are celebrating a good run for precious metals,  Bitcoin’s performance as an investment over the same period (seen in the post’s main photo above) is many multiples higher.  

What might these value gains be used for though, many precious metals investors who are skeptical about Bitcoin might ask?  While there are many vendors who accept bitcoins in exchange for gold and silver, announced in September by ICBIT was that for the first time bitcoins can now be used to speculate on gold futures contracts. [Editor’s note - ICBIT exchange has not registered with any financial regulators and it has not even revealed from which jurisdiction it operates.]

In addition to gold futures, ICBIT began offering crude oil futures contracts (WTI).  ICBIT has been offering BTC/USD futures contracts since July.  Though using bitcoins for speculation beyond holding the asset in a simple long position has previously been possible, the spectrum of these investment opportunities is widening and growing.

MPEX, which operates MPOE — an options exchange, saw further growth yet again according to its September report.  MPOE’s September CALL options trading volume was more than double that of the financial derivative’s volume from the previous month, which itself was more than double the month prior. [Editor’s note - MPEx has not registered with any financial regulators.]

Financial speculators aren’t the only ones gambling with their bitcoins.  Jon Matonis sparked a discussion about how cryptography introduces a dramatic change to the way online gaming operates — though many in the online gaming industry still remain unconvinced.

Further developments for the month include the release of a new version of the Bitcoin.org client.  Version 0.7 arrived after a nearly six-month lull since the release of v0.6 and includes features that were eagerly awaited.  Plans for a future version of the client include changes that will address the scalability issues that have been exacerbated with the transaction network’s rapid growth.

Also occurring in September was the Bitcoin 2012 conference in London.  Not only was the event well attended, the numerous videos of the talks from many of the speakers have been providing additional follow-on interest in Bitcoin.

And just as the month was about to end, launched was the Bitcoin Foundation — an organization that standardizes Bitcoin and protects and promotes the use of Bitcoin cryptographic money for the benefit of users worldwide.

Though many Bitcoin startups do exist, few have disclosed the amount of funds they’ve received from investors.  CoinBase, however, completed a round of funding in September which lifts its total investment to now exceed $600K USD.  Previously the largest Bitcoin-related startup to disclose its investment was CoinLab, which reported investment totaling an amount just slightly lower.

What may be a telling sign of Bitcoin’s potential is when a small Bitcoin upstart is not just seen as an attractive acquisition target but instead becomes the acquirer.  This happened with Ogrr which in September merged with its much larger competitor.  Ogrr takes advantage of one of the properties of Bitcoin, non-reversible transactions, which gives its online goods marketplace the advantage over its competitors who become weary battling payments fraud.

While Bitcoin’s success seems to come in fits and starts, what is actually happening is that ideas whose genesis occurred much earlier are now coming to fruition.

• Security procedures that would have prevented the BitFloor cyber-theft were identified more than a year prior, and exchanges that have implemented them continue to operate without finding themselves suddenly insolvent with their names appearing in headlines.
• Unlike traditional markets where the big mostly get bigger, customers support the second tier exchanges specifically so that fewer choke points exist.  For example, a young exchange, Bitcoin-24, is still relatively small and widely unknown but it just keeps growing at a very respectable pace.
• That more bitcoin transactions today are for the purpose of online gaming than for any other use should not be something that comes as a surprise.  This was identified by Rick Falkvinge and others well more than a year ago.  It just took the pairing with another innovation, “provably fair” wagering, for it to grow by leaps and bounds.
• That Bitcoin’s use in commerce is rapidly increasing was entirely expected. Merchants already know that their bitcoin revenues converted to dollars (or other fiat currency) spend just the same and the result is a new flurry of activity with ECommerce software and services.  In September, BitPay reached the milestone of having 1,000 merchants signed on.

If those developments aren’t enough to prove Bitcoin’s staying power, then September’s peek into progress on further innovations coming like distributed bonds and smart property will likely provide all that is needed to become totally convinced.

Bitcoin is not just some form of electronic cash. Bitcoin is the focal point of innovation that defines money on entirely new terms.

A glance at the exchange rate might give the impression that Bitcoin is 22% further along than it was a month ago.  What this increase in the exchange rate likely instead means is that the actual progress of Bitcoin and its ecosystem is significant enough that even the lofty expectations made previously were not ambitious enough.  As we are seeing play out before us, Bitcoin likely still remains significantly underestimated.

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