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The more credible the critics, the more valuable Bitcoin will become

Why the constant drumbeat of illegitimacy could fuel the next leg of the Bitcoin Rally.


First it was the gold bugs. Then the fringe economists and media. Now, some very important people and institutions have joined the Bitcoin fray in dismissing the digital currency as nothing more than a bubble du jour. But ironically, that is precisely why some market watchers say the digital currency could have real value.

In just the last 24 hours, former Fed Chairman Alan Greenspan said the virtual currency is worthless, and the People’s Bank of China outlawed the use of Bitcoin by financial institutions. But curiously, as the cries of illegitimacy grow louder, the value of Bitcoin is surging – rising more than 1000% in the last three months.

“The move by the PBoC to ban banks from dealing in Bitcoin could be seen as a blow to its acceptance, or it could signal China is attempting to regulate the currency,” said Brian Kelly of Brian Kelly Capital. “Regulation implies acceptance, which in Bitcoin's case equates to value,” Kelly added. In other words, the more important the protestors become, the more value the digital currency carries.

(Read: Bitcoin crashes 20% on China clampdown fears)

The main case against Bitcoin is that there is no way to value the currency. Critics say its price fluctuations are derived not from any underlying economic data, but rather solely from the actions of buyers and sellers. But that argument is beside the point for some.

“What’s the intrinsic value of a yellow rock that people wear on their bodies or a green piece of paper with dead presidents on it?” asked Rafferty Capital’s Dick Bove. “To assume it’s not a currency is to make a major mistake.”

Just because the price of a Bitcoin may seem excessive to some doesn’t necessarily mean the virtual currency is worthless, defenders say, a point of view that is slowing gaining traction among some serious market participants.

(Watch: Is Bitcoin already a bubble?)

“We believe Bitcoin can become a major means of payment for e-commerce and may emerge as a serious competitor to traditional money transfer providers,” wrote David Woo, the Head of Global Rates and Currencies Research at BofA Merrill Lynch.

Woo goes on to say that Bitcoin will have to become less volatile in order for the currency to gain mass appeal. And that may not be too far out.

“As a medium of exchange, Bitcoin has clear potential for growth, in our view,” Woo concluded.

So how does one figure out fair value for this new digital currency? Watch the video above.

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