At least one man is not bullish about Bitcoin – at least not at these levels and given the feeding frenzy surrounding it. He cites his rationale in a recent Ar Technica article. That Bitcoin’s value has reached the stratosphere and seems to be shattering new records daily is not big news unless you’ve been asleep for a while. But is it poised to move higher?
No doubt you probably haven’t been hibernating, and therefore must have read something about the roller-coaster Bitcoin market – maybe even in these pages by Ray and myself. Questions about the cryptocurrency abound. Is the rise in its value real? Is it sustainable at these levels, or will it go higher? How high could it go? Or is in dangerous territory- a bubble? If so, where will it settle? How far could it fall? And, of course, the best one for most of us who have been sitting on the side watching its meteoric trajectory in awe – is it too late to get in? On this point, the author of the Ars piece is skeptical.
Many so-called experts declared a Bitcoin bubble back in 2013, when it reached $1000. By the way, that was about its price at the beginning of this year, too. That would have been a reasonable assumption given its evaluation of, say, $5 about five years prior. But when it comes to investing- especially speculative investing – there are no reasonable assumptions. And this presupposes that you even deem cryptocurrencies an investment! Even valued at $1000 back in 2013, bitcoins in circulation were worth around $15 billion- still quite small as global financial assets go.
Today, as of this writing, a Bitcoin trades at around – hold onto your hat- $17,000—although it could be a thousand more or less by the time I finish this article, and even higher or lower by the time you read it! Such are the crazy fluctuations. Let’s put its market value in perspective. Back in 2013, when Bitcoin was at $1000, that equated to a circulated value of only $15 million at a time when $USD in circulation were $1.2 trillion.
Even at today’s inflated levels, it only has a circulated value of $280 billion in a world where all currencies in circulation are somewhere around $75 trillion-90 trillion. In this “real world” of currencies, perhaps many billions of transactions are done each second. Whereas by comparison, Bitcoin transactions are performed a measly four transactions a second. So, it’s no wonder that some folks are skeptical that its high market value and feverish appeal warrant serious attention as an investment– and that’s if you maintain that it is indeed a bona fide investment vehicle.
Increasingly, there are growing indications that ordinary unsophisticated investors may be getting in over their heads. This is usually the warning sign of a frothy bubble. Let’s look at the tell-tale signs. One is that people are borrowing money – even on their credit cards – to buy in. A usual January headache scenario was a debtor lamenting a holiday gift-buying binge when the year-end bills came home to roost. Imagine the added buyer’s remorse if the bills include Bitcoin bought on credit, if the cryptocurrency tanks! Scarier, is the “investor” who mortgages the house to get in. Holy 2008 déja vu!
So, let’s analyze why it may not be wise to be bullish on Bitcoin and to bank on further rises in its value. If people aren’t using cash and are turning to the only means they have available-debt, it’s signaling diminishing demand- If not a false demand. The Ars Technica author posits that:
“This also means that there’s limited room left for speculation-driven gains. The cycle that has driven bitcoin price gains so far—a rising price driving media attention, which drives further price gains—only works if there’s a large pool of people out there who haven’t heard about bitcoin yet. And that pool is dwindling fast.”
There are also other mitigating factors to consider. The notion that Bitcoin is likely to be a major player in the currency markets is not borne out (see above for relatively small market share). Then there is the abysmally small number of transactions that can be processed in a second, and the approximate $20 cost per transaction. Last but not least, another speed-bump is the extraordinary energy consumption of producing Bitcoins. I wrote about it last week and it is truly staggering.
If you got in early, you have a right to be joyous. For others- caveat emptor. I guess with the dark web demand, there will always be a place for Bitcoin at some level. But some of the numbers being bandied about for the prospective future value just don’t seem to be supported by the data.