Below is an actual email I sent to one of my top clients, who is a global business leader, when we were discussing Bitcoin today.

You may not be a client but you can read this email for free — I’ve removed any confidential information and I think the content makes for a decent and informative article about how Bitcoins work.

[I realize some technical details — such as Bitcoin mining– are not fully explained – this was because I wrote this for a specific person based on the style that person prefers.]

Hi ____,

(Excuse the long note, it will answer the questions you asked and also fully equip you for cocktail /water cooler conversations which I GUARANTEE will come up!)

Bitcoin works by allowing direct transfer of money/ coins peer to peer anywhere in the world…the rational for the price increase is due to supply and demand and increasing signs of this being a real and viable thing.

It’s fascinating.

HOW
A very complex computer program on a shared network creates (to be mined) the digital “coins”which are basically a series of numbers….each one is unique.

WHAT
These digital coins can be easily transferred, converted to USD, EUR, CNY or used to purchase tens of thousands of goods online. (Every major hacker and academic has attempted to counterfeit, hack or find flaws and numerous papers have been written which say it won’t likely happen due to the way the code is written and open source and other details.)

This has created a completely decentralized global currency instantly transferable and untrackable.

The idea of digital currency came about in the 80s — five years ago Bitcoins started — at first very experimental with tech geeks buying pizzas etc and traded at around .22 then a dollar each.

RISE IN VALUE
When Cyprus collapsed, Bitcoin had it’s first major surge as it was seen by some as a gold-like alternative but with easy transport across borders. It was also seen as a black market facilitator due to its decentralized nature with underground goods reaching hundreds of millions in sales.

WINKLEVOSS
Shortly afterwards, the Winklevoss twins (VCs and Facebook lawsuit winners) bought about $90 million worth or 1% of Bitcoin.
Winklevoss targets a $400B market cap for Bitcoin (from $7-9b today)
(someone else appears to have bought $150 mm worth this week, it’s unknown who)

CHINA / BAIDU
As the price reached $100 and $200, China became interested — it’s in the news there daily now.

The massive Chinese state internet company Baidu announced they will accept Bitcoin as a form of payment.
It’s unlikely Baidu would do this without the tacit approval of the Chinese government (who also knows this is a slight toward the USD which is not overt)

US Senate hearings this month were surprisingly favorable and unlikely to lead to attempts at heavy-handed regulation. (Which is logistically nearly impossible given the de-centralized nature, you would have to shut down the internet to stop it entirely)

The China interest and US hearings brought Bitcoin past the $700-800 mark in very volatile trading. (Mkt cap of 7-9 billion USD)

ACCESS /DEMAND
There is only one major exchange in the US – called MtGox — it is plagued by delays from tens of thousands of applications for new accounts….just processing wires takes a week or more and an AML check takes 30 days due to backlog.

The main broker/ exchange in China received an investment from Lightspeed Venture Partners and China is getting something like 60,000 inquiries a day.

WHY
I think Bitcoin is transformative for a few reasons:

– Digital currency is an idea who’s time has come — eventually the role of decentralized alternative currency can become to conventional currency what email was to snail mail ….that doesn’t need to fully happen for Bitcoin to do well.

– Technology now allows that some portion of the role of central banks can be replaced by the marketplace. This may take 50 years, but in the meantime there is plenty of room for massive growth.

– First mover, as investors in China and the US see this as a place to save and store, the market cap can increase significantly….this, in turn leads or it being a more viable alternative to some tiny piece of real currency.

– Acceptance by big groups like Baidu and others like Richard Branson (who announced Bitcoin will be accepted for Virgin Galactic flights and I think likely later all flights) makes this the standard.

– On the high end is globally transformative….on the low end it kills and replaces something like Western Union, which is still a big deal.

Almost a year ago I had a conversation about Bitcoin with —-deleted——- [a leading Venture Capitalist. Basically he’s interested in the space, we are looking for ways to participate]

Since then, especially based on China, I’ve become more convinced.

We are talking about global access now….. when else have Chinese citizens and EU and US been able to buy the same investment on the same platform? We know the significance of Chinese savings and interest in non fiat currency….as well as the transformative power of decentralized collaborative networks….as well as the risks in conventional global fiat currency.

Clearly if we talk in terms of it replacing even a tiny fraction of real global currency it is a huge deal…..too much in the air for that, but I think access and interest alone can bring it to a value somewhere around AAPL or the $400B the Winkelvoss twins target….this is still a small drop compared to real currency numbers but would place Bitcoin at $30-40,000 per coin.

Risks are high, it is very volatile….one article shared at [major firm] says it will be back down to $250 by months end. It can return to thin air and head back down to a penny. I thought government regulation was the largest risk but the Senate has missed that boat…unless some major event creates a compelling national need, they are unlikely to try now…toothpaste is out of the tube. So now the biggest risk is whether this is real or not….this is why China and Virgin etc. are significant.

[deleted specific recommendations particular to this person etc.]

Let me know if you want me to look at ____ XYZ – we should participate.

That’s my two cents worth!
(Or .00000023 Bitcoin worth)

-Bruce

Bruce Fenton
President and Managing Director, Atlantic Financial Inc.