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Scrutinizing The Real Threat Of Virtual Money

CHRIS LAU, KAPITALL: After peaking at around $240, Bitcoin last traded at around $120.50. Investors may view the Bitcoin as a case study for being in a bubble, but there is real need for the currency in some circumstances. Bitcoin does not have a store of value like gold, but it may be used to exchange for goods, real currency, and is in limited supply. Conversely, some world currencies are becoming endlessly available, hurting their worth. For example, Japan announced a quantitative easing program that aims to depreciate its currency. [More from Chris Lau:  4 Semiconductors to Watch Ahead of Earnings Report]

mtgox

Chart Source: Mtgox

The possibility that Bitcoin is a threat to the credit card was asked by Discover Financial Services (DFS). Wall Street Journal reported the CEO said:

“I guess I would be a little surprised if Bitcoins actually had an effect…on us over time.”

Discover is partnering with EBay’s (EBAY) PayPal, which will allow PayPal users to use their phone number to make payments to stores that accept Discover cards.

For now, Bitcoin is in the early phase of attracting online merchants. Its competitive edge over traditional financial houses is that it helps users avoid transaction fees charged by credit card companies.

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MasterCard (MA), Visa (V), and American Express (AXP) would be hurt if Bitcoin were to gain traction. The card companies would need to lower transaction fees or provide additional incentive as a response. Traction would only rise if demand and supply dynamics were to favor the use of Bitcoins. More merchants would need to embrace Bitcoins, while more consumers would need to accept the risks of using the “currency” in favor of avoiding fees.

In the chart below, the card companies are valued with a price of profit (or “POP”) of between 14 and 21. Investors do not expect Bitcoin to be much of a threat:

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