Not Your Ordinary Bubble
Bitcoin (COIN) (OTCQX:GBTC) has surged by over 50% following its roughly 20% correction a week ago. The resilience of the cryptocurrency is remarkable as BTC continues to hit new highs seemingly each day. With prices up by over 2,000% in the last year alone, people are often equating Bitcoin to former bubble like phenomenon, the Nasdaq Bubble, Tulip Mania, and other hype induced crazes throughout history. However, is it possible that “The Bitcoin Mania” is only in the opening stages of this historic run? If so, how high could the price go? And what if Bitcoin is not in a bubble at all?
What Bitcoin Is
Bitcoin can be considered many things, a store of value, a digital commodity closely resembling a digital version of gold, a speculative trading instrument, a form of currency…
BTC The Store of Value
With a roughly 2,000% increase over the last year Bitcoin has become an enormous source of value as well as a store of wealth for people who own BTC and believe the digital commodity will keep appreciating going forward. These individuals are different from speculators, as they own their Bitcoins with the expectation that BTCs will be worth a lot more in the future.
A Speculative Instrument
On the other side of this equation BTC has clearly become a speculative trading tool for other individuals. With such astronomical gains traders and speculators are flocking to BTC to buy high and sell even higher.
Perhaps the most fascinating aspect of Bitcoin is its commodity like properties. Just like all physical metals BTCs must be mined to come into existence. Moreover, Bitcoin mining is difficult, expensive, and comes with proof of work. This phenomenon is what inherently makes BTC a valuable commodity, much like gold. Conversely, what makes it different from gold and all other physical commodities on earth is BTC’s finite amount, only 21 million Bitcoins can ever be mined.
Therefore, Bitcoin is a speculator’s dream in this respect. Can you imagine how much gold would be worth if market participants knew that only 21 million ounces could ever be pulled out of the earth, and we were in the process of mining close to the 17 millionth ounce? That’s kind of the sweet spot BTC is in right now, and that limited amount makes the digital commodity extremely desirable to own.
Moreover, a recent report reveals that between 2.78 and 3.79 million BTCs appear to have been lost forever. This implies that the overall pool of Bitcoin is likely to be scarcer than previously expected and a mere 17 to 18 million will ever be in circulation instead of the previously thought 21 million.
BTC as The World’s Currency
In addition to being a legitimate digital commodity, and a store of wealth, Bitcoin also has extremely strong currency like characteristics. It explicitly exhibits traits like durability, divisibility, transportability, scarcity, recognition, is believed to be impossible to counterfeit, and in time should gain stability as well as consistency. Moreover, it can’t be printed continuously like fiat currencies, is not controlled by a central authority, and has a genuine possibility of becoming the currency of the world one day.
Transactions using Bitcoin continue to increase and with roughly 280,000,000 transactions BTC could hit 300 million total Blockchain transactions by the end of 2018. Furthermore, Bitcoin is being recognized as legal tender by Governments, which is a huge step towards mainstreaming BTC as a legitimate world currency. Recently Japan officially recognized BTC as legal tender in April 2017, a move which is likely to be followed by other nations around the globe.
What Bitcoin Is Not
So, now that we have looked at what Bitcoins is, let’s look at what it is not. Bitcoin is not a fraud, a Ponzi scheme, a mirage, the dotcom bubble, a company, and it is definitely not a tulip bulb.
There have been numerous respectable business people and captains of industry who have had some rather negative things to say about BTC. For example, Jamie Dimon, CEO of JPMorgan recently called the digital currency a “fraud” amongst other degrading things. The Oracle of Omaha, Warren Buffett called it a “mirage”, and warned people to stay away from it years ago. DBS Group’s David Gledhill, recently went as far as to call BTC a “Ponzi scheme” (by far not the only prominent business person to call it that). And although Mr. Gledhill didn’t elaborate on why he thought BTC was a Ponzi scheme, he did say that “we don’t spend that much time on it”.
Also, analysts, news anchors and other high profile individuals are constantly comparing BTC’s overall value to market caps of companies. And of course, comparing the BTC phenomenon to Dutch Tulip Mania of the 1630s appears to have become a favorite amongst many Bitcoin skeptics in the financial industry.
So, is Bitcoin a Fraud or a Ponzi Scheme?
Bitcoin is becoming widely accepted as a store of value, a digital commodity, and a legitimate form of currency. Moreover, to my knowledge the cryptocurrency does not appear to share any common characteristics associated with fraud or a Ponzi schemes. Furthermore, I have yet to hear any specific compelling evidence as to why BTC may be a fraud or a scheme of any kind. Therefore, claims classifying BTC as a fraud, or a Ponzi scheme are preposterous in my view
Is the Bitcoin Phenomenon Like the Nasdaq Bubble?
Nasdaq is a stock market, comprised of companies whose share prices reflect value on the basis of income and other metrics. Bitcoin is a completely new phenomenon, a digital commodity, with store of value, and currency type attributes. Therefore, it is very difficult to compare BTC and its price appreciation to anything and comparing it to Nasdaq in the 90s may not be that applicable. Nevertheless, people sometimes forget that the Nasdaq is now over 40% higher than at it’s highs during the Dotcom boom.
The Dutch Tulip Mania Bubble
Bitcoin is a worldwide phenomenon, while the Tulip Mania was confined to a small area of the globe. Tulips were valued for their status symbol attributes, and had no actual functional value like Bitcoin does as a medium of exchange, or a store of wealth. During the height of “Tulip Mania” a single bulb could be traded for a mansion and some bulbs went for multiple times (roughly 8x) the average yearly salary. By these metrics a single Bitcoin would cost about $400,000. So, when comparing Bitcoin to the Tulip Mania phenomenon analogy it appears that even if BTC is an a bubble like state it is nowhere near the level of craze tulip bulbs were in the 1630s and is very likely still towards to opening stages of its ascend.
Comparing BTC to Companies
Bitcoin is obviously not a company, and the functionality it provides as a commodity like store of value resembles gold much more than it does a company. Also, the currency like attributes Bitcoin possesses and the possibility of the cryptocurrency to one day become the currency of the world warrants a comparison to the total value of fiat currencies or gold much more than it does to a company.
In that case, the approximate value of all the gold in the world is roughly $7.5 trillion, and the M0 to M3 money supply of the world’s fiat currencies is about $5 trillion to $75 trillion. So, with BTC prices at around $16,000 Bitcoin’s market cap is about $265 billion. This is only about 3.5% of the entire gold market. So, for Bitcoin to have a comparable market cap to gold the price would have to increase to approximately $450,000 per Bitcoin. This seems a lot more logical than gaging Bitcoin’s to Boing, or other corporations.
Is it Possible That Bitcoin is Not a in a Bubble?
The fact that BTC is used as a currency on a daily basis, and the fact that numerous people use BTC as a genuine store of value, suggests that Bitcoin may not be in as much of a bubble as some skeptics would have you believe. Moreover, transaction volume in BTC has not increased all that much over the past 2 years. Daily Blockchain transactions have increased from about 200,000 to roughly 300,000 over the last two years, hardly a bubble-like surge. In addition, BTC doesn’t appear to be exhibiting many of the characteristics witnessed at the height of other craze infused manias. Also, If we observe a logarithmic chart which goes by percentage change, we can see that Bitcoin appears to have plenty of room to run in this current leg higher.
Many people are simply holding on to their Bitcoins to create value and store wealth, not flipping them just to make a buck. BTC continues to be used as a world currency and is continuously becoming ever more adopted. And although there are some bubble-like attributes associated with the hype and increased interest surrounding Bitcoin, the cryptocurrency is very likely still in the opening stages of a possible “bubble”, second or third inning. Therefore, as events continue to unfold and the Bitcoin surge progresses the price is likely to go a lot higher before it crashes, if it crashes at all.
I don’t see why Bitcoin can’t eventually have a combined market value comparable to gold or to the M0 money supply. Therefore, my end of year 2018 Bitcoin price target is $50,000 and my 2022-2023 price target for Bitcoin is $400,000 – $500,000.
Important Note: Bitcoin remains a very speculative investment and has significant underlying risks associated with it. Possible government intervention, hacks, and other detrimental developments could cause a drastic price decline in a relatively short time period. Investing in bitcoin comes with significant risk to loss of principle.
Additional Note: This article expresses solely my opinions, is produced for informational purposes, and is not a recommendation to buy or sell any securities. Investing comes with risk to loss of principal. Please always conduct your own research and consider your investment decisions very carefully.
This idea was discussed in more depth with members of my private investing community, Albright Investment Group. To get access to exclusive articles, receive trade triggers, obtain price targets, and discuss specific trade strategies Become a member today >
Disclosure: I am/we are long COIN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long Bitcoin as of recently (late November).