Monday, February 17, 2014

The Price of a Bitcoin

What is the current price of one Bitcoin?

This is a very simple, straightforward question that should have an equally simple, straightforward answer.

And, yet, I haven't found the answer anywhere — not among bloggers, technologists, traditional journalists, economists, traders, or venture capitalists.

As of this writing, Mt. Gox indicates it's $374; Coinbase signals $658; BTC-e calls for $635; Bitstamp points to $655; Justcoin shows $679; LocalBitcoins seems to offer a range of $664–$828...

So, which is it? Do I get to choose? Does my transaction counterparty get to choose? Is it an average? Can I buy low (and then immediately sell high)? Maybe it’s the median?

In the world of equities — which feels like a reasonable parallel, considering so many people seem to be buying / holding Bitcoins as an investment, rather than an everyday currency — it would be like seeing wildly different digital quotes for Google's shares at every brokerage simultaneously: $1,202.80 at Schwab; $986.12 at E*TRADE; $759.54 at Fidelity; $844.03–919.99 at TD Ameritrade…

Odd, right?

The only thing I think I can think, then, is that there are actually two components to any stated Bitcoin “price:” (i) the actual inherent value of one Bitcoin and (ii) the premium (or discount) associated with the various Bitcoin exchanges / platforms.

I’ve never seen or heard it presented in such a manner, but it seems to be the only plausible conclusion, in my mind.  

Which then begs the question: what is the actual inherent value of a Bitcoin versus the associated exchange / platform premiums (or discounts)?

Perhaps the answer is in Mt. Gox, where mounting distrust has likely destroyed any embedded premium in the platform?  If we assume that prices on Mt. Gox are even close to valid, would it then be reasonable to conclude that the inherent value of a Bitcoin is at or, perhaps, just below the $374 level, and that all other prices on all other exchanges are padded with ~$300 of premium?

Then again, what if Mt. Gox pricing now actually reflects a massive discount due to heightened fears of liquidity?  Maybe, then, the inherent value is really closer to $600 and there’s ~($225) of risk implied in a trade on Mt. Gox??

One Bitcoin; two wildly different, yet justifiable, possible values.

Which is correct?  I don’t know, and I’m nowhere near intelligent enough to solve the riddle (were I even inclined to try).  But, I would hope that with all of the attention being paid to Bitcoin by “smartest people in the room” types, an answer would be forthcoming.  Apparently, the future of commerce depends on it.