This Bitcoin Thing Could Be Big, Says Bank of America

Nope, Bitcoin’s not in a bubble at all. No way.

Bank of America has issued a research report suggesting that the crypto-currency Bitcoin could become “a major means of payment for e-commerce” on its way to emerging as “a serious competitor to traditional money transfer providers.” (Hat tip to The New York Times for the link to the PDF.)

The financial giant also believes that Bitcoin may lose its appeal as the e-currency of choice among drug dealers and other nefarious characters, as its transactions are public knowledge (although one’s real-life identity can be partitioned from the aforementioned transaction, making it difficult to track down who’s doing the buying and selling). Bank of America attaches a “maximum market capitalization” of Bitcoin at roughly $1,300, based on its position as a “major player in both e-commerce and money transfer” as well as “a significant store of value with a reputation close to silver.”

Bitcoin has come close to exceeding that theoretical ceiling in recent months, although its valuation dove this week after the People’s Bank of China decided to declare it a volatile “currency” without real legal status; that financial institution is also concerned about its use in money laundering and black markets.

First launched by the pseudonymous “Satoshi Nakamoto” in early 2009, Bitcoin relies on a decentralized P2P network to send payments, and it lacks a “central bank.” The system is designed to never exceed 21 million Bitcoins (current supply stands at roughly 12 million), and the underlying code ensures a consistent rate of currency generation.

Bank of America sees Bitcoins’ advantages as low transaction costs, its finite supply (which will protect its value), and its increasing attractiveness as an alternative to “traditional” cash. As with the People’s Bank of China, however, the bank sees the currency’s extreme volatility and lack of legal backing as a bad thing, and frowns at the possibility that regulators could step in and increase transaction costs.

“A 50 minute wait before payment receipt confirmation is received will prohibit wider use,” the report adds. “This is less of an issue for two parties that know each other because they trust the other will not double spend, but when dealing with an anonymous counterparty this creates a high level of unhedgeable risk.” Without a “central counterparty” to verify transactions and thus mitigate that risk, Bitcoin could fail to break into wider use.

Whether or not Bitcoin can maintain its position as the dominant crypto-currency, there are indications it’s started to take more of a mainstream role. More Websites consider Bitcoin as acceptable tender for services and physical goods; and in a splashy demonstration of his showman chops, Richard Branson recently announced that Virgin Galactic will accept Bitcoin for rides into space.

 

Image: Bank of America

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