Forex Flash: So what´s the deal with bitcoins - Societe Generale

FXstreet.com (Barcelona) - Sebastien Galy, Senior FX Strategist at Societe Generale has caved into popular demand and taken a look at the fledgling bitcoin market.

He begins by noting that Bitcoins have a money supply that is theoretically increasing following an algorithm approximating the effort of mining. With far more rapid advances in the technology of processing than mining, the rules have already been changed to stop some form of mining, which is effectively a form of revaluation of the currency.

In terms of monetary approach, one way to value bitcoins would be to compare the money supply of the US to bitcoins. However, that simplistic approach would make bitcoins very valuable if they end up being able to buy the same USD asset. He feels that this is a supply approach and easily insolvable.

Looking at the Law of One Price approach, on the demand side a dollar is used to purchase say a piece of software or game tokens within a game or to pay someone for watching a video. This is where the reality meets the rubber. He writes, “As far as I can see within a game, the value the bitcoin is devalued as games introduce their own tokens (e.g. Metal storm has now three different levels of tokens depending on whether it is externally tradable, internally..).” If the bitcoin becomes too expensive it loses its usefulness as a numeraire used for exchange.

In terms of legal framework, from a technical point of view, the bitcoin is not yet a currency in the sense that the currency is not anonymous. Volume is low and hence it is easy to influence the price. He adds that there is no certainty that the supply of bitcoins will follow the original rules as these rules have already been changed and presume a trust in the ones able to issue the currency. In many countries, printing money is a state privilege that will come to bit in the future as this, like gambling is regulated for good reasons.

From a technical perspective, he writes, “From a trading point of view, we broke out of the upward trending channel in an exponential upswing typical of aggressive bubbles. As all bubbles there is a good story behind it, the trick would be to measure both the supply side and more importantly demand side value of bitcoins.”