Ask most people that work in finance what they think about Bitcoin, and the likely response will be; “it’s a bubble”.
Google certainly seems to think so too, with “Bitcoin is a Bubble” returning 31,800,000 results, proof of how many times people have, incorrectly so far, called a top in the price of the world’s most famous cryptocurrency.
I’ve been fortunate enough to study Bitcoin for many years, and first wrote about it back in 2013. Given the recent price action, and the volume of inquiries about Bitcoin from precious metals enthusiasts, I decided to put pen to paper in a detailed report titled; “Bitcoin, Dollars, Gold: What is the Future of Money”.
The first point I make is that I see considerable potential in blockchain, and it could disrupt an almost limitless number of industries in the years ahead.
Secondly, I can see the attraction of speculating in Bitcoin with a small portion of one’s wealth, especially given the broader monetary, market and macro-economic factors that investors are facing today.
Be that as it may, there are plenty of ‘bubble’ warning signs in Bitcoin today, and in cryptocurrencies as a whole. The size of the price gains alone, and the speed at which it is rising, should be of concern to any disciplined investor.
Projections of $25 million per coin are popping up in my twitter feed, a pretty sure sign people are getting way ahead of themselves.
It isn’t just the bubble dynamics that worry me. There are also a number of other concerns re Bitcoin that investors should be paying attention too.
Concentration of ownership is a major issue, with well over 90% of all Bitcoin owned by less than 5% of all Bitcoin wallet holders. Control of the Bitcoin network is also highly centralised, with most Bitcoin ‘investors’ having no say in the recent forks that have taken place, whilst the very process of forking itself brings in to question the ‘consistency’ of Bitcoin as a monetary asset.
I am also skeptical of the so called ‘network effect’ of Bitcoin, which based on my study, still falls well short of both the US Dollars, and especially gold.
Investors are confusing Bitcoin’s potential as a payment mechanism, versus its potential as money itself. To draw an analogy, crypto-enthusiasts are mistaking the pipelines for the oil.
Finally, Bitcoin bulls will, by necessity, be sadly disappointed in its price trajectory if it truly is to become the primary form of money used in commerce. After all, economies would simply cease to function in any environment where money itself generates a greater return than enterprise.
As such, as far as I see it, Bitcoin enthusiasts are essentially arguing that the short-term price outlook for Bitcoin is so good, because the long-term outlook for Bitcoin is that it won’t return anything.
If the above statement sounds confusing, it’s meant to, because it doesn’t make any sense, yet this is in effect the long-term bullish argument for Bitcoin.
As such, to summarise, when it comes to Bitcoin:
• Blockchain is real, and it is here to stay
• Risking a very small amount of capital (ie only what you can afford to lose) by speculating in Bitcoin or other cryptocurrencies can make sense
• Prices look very bubble-like, and people should be cautious about investing after such a mammoth run up in prices
• Irrespective of Bitcoin’s technological potential, it is unlikely to meaningfully disrupt the existing monetary system
• Physical gold and silver remain the simplest, and likely most effective forms of wealth protection available to everyday investors.