If you have not bought any Bitcoin, please read this post carefully.
If you have bought any Bitcoin, please read this post carefully.
To understand whether or not Bitcoin is a bubble, we first need to understand Bitcoin.
Unique unto itself, the first cryptocurrency combines three things into one thing:
- It is a social network platform.
- And it is a currency.
- And it is a store of wealth.
Nothing ever invented does all these things at once:
- LinkedIn is a popular social network platform, but that is all it is.
- Government-issued (fiat) currency works as money, but is a poor store of wealth due to inflation and other risks, such as sovereign incompetence.
- Gold is a popular store of wealth but can’t be used for transacting.
In more detail:
- The value of any network is determined by how many people subscribe to it. Bitcoin, being neither a spoken nor written language, but rather a mathematical protocol, transcends culture, nation, border, morality, regulation, and space. Being decentralized, it has no central server. It has tens of millions of users worldwide, which number is increasing exponentially as it gains mainstream adoption. Among the thousands of cryptocurrencies, Bitcoin is the original, the simplest, and is worth more than all other cryptocurrencies combined. It has the brand name. It is the brand itself, and constitutes the very reason that the (potentially world-changing) blockchain protocol was even invented. Other digital coins are called either altcoins or bitcoin. Bitcoin is elemental; well described as digital gold. One could call an altcoin “a Bitcoin with an app”. As its network size increases, so does Bitcoin become more valuable and more powerful.
- Bitcoin is de facto currency. Money is money because people think it is money. Bitcoin is used the world over to purchase most anything. It is legal tender in Japan. Its (current) high transaction cost makes it unsuitable for small transactions, but its impenetrable security makes it perfect and popular for large ones.
- Although Bitcoin was originally intended to be a “peer to peer electronic cash system” (as per its white paper written by its cryptic inventor, Satoshi Nakamoto) it has now become so valuable that people tend not to want to spend it. Instead, they “hodl”. This development has made Bitcoin’s ‘scalability problem’ (for fast, cheap, transacting) somewhat irrelevant, at least for now. Its attraction, then, as a store of wealth has a lot to do with its combination of unique properties: It is indestructible, immutable, unseizable, infinitely portable, at once visible and invisible, divisible, impenetrable and anonymous. Added to this is its provable scarcity.
We can see why Bitcoin appeals. But is its price justified?
Three famous examples of bubbles are the so-called Tulip bubble of 1637; the dotcom bubble of 2001 and the housing bubble of 2008. Let’s compare each one to Bitcoin.
We can immediately see that to compare Tulips to Bitcoin is ridiculous. I won’t waste time with this other than to say that tulips are perishables that can be produced ad infinitum.
The dotcom bubble is more interesting. But again, you are comparing the frenzy for shares in companies in a new industry (Information Technology) to that of a single entity (Bitcoin) which, as we have seen, is neither a company, nor a product, but a mathematical protocol. More useful would be to try to compare the ‘internet’ to Bitcoin. But the internet is not quantifiable, whereas Bitcoin very much is.
The housing bubble was one giant systemic fraud perpetrated by banks, with government collusion. So, again, to try to compare it to Bitcoin makes no sense because you are comparing something vague and obtuse with something specific.
But I can see where people using these analogies are coming from: They are pointing to the frenzy; the mass hysteria; the FOMO (fear of missing out).
Yet history has examples of things whose prices started off low, and have continued to rise, and whose prices have never ‘burst’. Although there are lots of examples, including some companies’ shares and certain real estate, let’s choose three: Gold (but a shiny element dug out of the ground); fabled works of art; and just for fun, Superman Comic #1 (1938).
These things all have something in common:
- Unique utility
To pay $1000 for an ounce of gold (there is only so much of the stuff available) is objectively no more unusual than to pay $1.5 billion for a Da Vinci painting (the only one on the market), or $1m for a Superman comic (only ten known examples of #1 survive).
Which brings us to Bitcoin’s attributes:
- Unique utility: Bitcoin has attributes possessed by no other entity, which create its utility.
- Desirability: Unlike art, comics, and even gold, it is Bitcoin’s combination of qualities that have created its international demand.
- Scarcity: The last of 21 million Bitcoins will (theoretically) be mined in the year 2140. Today there are an effective approximately eight million Bitcoin in circulation, which number will not materially change in our lifetimes: The protocol ensures that 12.5 new Bitcoin are mined every ten minutes. So even if you had a computer the size of the Empire State Building, your mining reward would remain a static 12.5 Bitcoin every ten minutes (the protocol cranks up the ‘difficulty’ accordingly).
In other words, we have seven thousand million people chasing eight million coins. Hence a price today of some twenty thousand times more than a single US dollar.
Because Bitcoin is almost infinitely divisible, and because users can have more than one wallet, it is impossible to know how many people worldwide own this crypto coin. But, be it five million or fifty million in number, it is still a tiny fraction of the world’s population. With a market cap of say $300 billion, it constitutes a minute fraction of the world money supply. Institutional investment (pension funds, hedge funds, endowments, and so on) into Bitcoin is right now approximately zero – for the simple reason that Bitcoin is not as yet not ‘approved’ for these highly regulated vintage environments (apart from a couple of ‘futures’ exchanges… but of course a futures contract is no more than a side bet on where Bitcoin’s price is going, and is settled in fiat). But it will be. The consumer will so demand.
For me then, it makes no more sense to say that Bitcoin was, or is, a bubble, be it at one dollar, at $10, at $10 000, at $100 000, or even at a million dollars. The relationship between its utility and its scarcity makes the price what it is. It is an idea whose time has come. At $20 000, Bitcoin is not a bubble, but a bargain. The herd is coming. It may become the most valuable thing in the world.
Sound financial decision-making happens when we first listen to others, then do our homework and think for ourselves. May this blogpost please constitute part of your own homework, so that you can formulate your own opinion, and become your own expert? Then at least you can live or die on your own best work. Remember that as far as the markets go, there are no experts. Not one. And not me.
This post has been written for entertainment purposes and does not constitute financial advice.
The flipside of FOMO: One evening in 2010 a youngster in London was hungry, and broke. But, in his computer, he had some ‘digital tokens’. So he used 10 000 “Bitcoin” to buy two pizzas. Today he can reflect with pride on having consumed the most expensive meal in the history of mankind. Two hundred million dollars’ worth of crust and toppings. Why didn’t he just buy one?