In the week that one Bitcoin hit a record $6,000, and its market cap went over $100 billion, is Bitcoin a good investment, a bubble, or a big scam? Answers below:
Last month JP Morgan CEO, Jamie Dimon said of Bitcoin: “The currency isn’t going to work. You can’t have a business where people can invent a currency out of thin air and think that people who are buying it are really smart. It is worse than tulip bulbs..it will eventually blow up.”
On the other hand, this week, Fundstrat Global Advisor Tom Lee set a mid-term Bitcoin price target of $25,000 (Over 4x times today’s record price) saying “You could easily get to $100,000, $200,000 numbers.”
Yesterday, Hedge Fund Manager, Mark Yusko (who a few months ago said “The US stock market is going to have a crash and it will be massive.”) tweeted his long-term target for Bitcoin: $1,000,000.
If you have been equally baffled by the crazy growth of Bitcoin, ICOs and Cryptocurrencies (The industry has grown from $20 billion in January to $140 billion today), this post is for you. I’ve simplified (while trying not to over-simplify) what’s going on here. I also tell you whether I’m buying Bitcoin or running the other way:
In 1875, Economist William Stanley Jevons defined money as having a number of functions, of which the two biggest were as a “medium of exchange” and as a “store of value”.
Anyone (including Jamie Dimon) who think of Bitcoin as a “medium of exchange” would of course see it as a scam and a massive bubble. How could you have a made-up currency that isn’t backed by anything? How could it be worth so much if it’s still so difficult to buy things with it? Surely everyone will realize eventually and the price will crash?
All those who see Bitcoin as a “store of value” are the ones who see its price continuing to grow.
Why? In justifying his $25,000 target, Tom Lee says: “Bitcoin is our digital gold. The gold market, which is 9 trillion, and for a generation of investors gold was their store of value. I think this next generation of young people view bitcoin as their store of value.”
Is Bitcoin the new gold?
In 1996, at the dawn of the Internet, Douglas Jackson had a dream of a new digital gold that wasn’t controlled by governments, and he launched “e-gold”. It grew rapidly and by 1999, the Financial Times said it was “the only electronic currency that has achieved critical mass on the web.”
By 2006, e-gold had over $2 billion worth of transactions a year, and that’s when the FBI shut it down overnight through a series of raids in “Operation Goldwire.”
The mystery creator of Bitcoin, “Satoshi Nakamoto” has remained hidden so governments (who would be most threatened by not having control over their citizen’s money) could not easily close Bitcoin down as they did with e-gold.
He wrote at the time of Bitcoin’s creation:
“As a thought experiment, imagine there was a base metal as scarce as gold but with the following properties:
> boring grey in colour
> not a good conductor of electricity
> not particularly strong, but not ductile or easily malleable either
> not useful for any practical or ornamental purpose
and one special, magical property:
> can be transported over a communications channel”
In other words, imagine if Bitcoin could do a better job than gold as a pure store of value.
How does Bitcoin compare to gold?
According to Thomson Reuters, the total gold in the world is just over 5.8 trillion ounces, with around 80 million new ounces mined each year. That compares to 16.6 million bitcoin, with the number of bitcoins mined halving each year, leading to a maximum of 21 million bitcoins with the last being mined 123 years from now, in 2140.
Bitcoin by design is limited in supply. Gold was also meant to be limited. But science has evolved to the point where gold is at the point where it can soon be created synthetically https://www.cnet.com/…/bling-researchers-create-24k-gold-i…/
So an increasing number of investors are choosing to use Bitcoin as a reserve over gold, and the current price rise in Bitcoin can be linked to the following three upcoming events:
1) THE NEXT STOCK MARKET CRASH
During this week - the 30th anniversary of Black Monday 1986, the worst stock market crash in history - many investors are warning of the potential of an even larger crash from the record highs we are seeing today.
In a CNBC article, NYSE trader, Kenny Polcari, wrote about the possibility of an upcoming crash:
“Can it happen again ... even though we have circuit breakers? Yes it can. But, it would be different this time because the speed at which it can happen is mind-boggling. Technology allows for anyone with a computer to access the markets, sending in orders for execution in a fraction of a second.” (Today over 90% of all trades are automatic computer-generated trades).
As people see the stock market as an increasingly risky bet, parking money in bitcoin becomes more attractive.
2) THE COLLAPSE OF THE US DOLLAR
This year China has become the world’s largest importer of oil, and last week it was reported that they are now compelling the UAE to sell them oil in yuan instead of US dollars. They have also jointly announced with Russia the “Yuan-Ruble” to increasingly bypass the use of the US dollar and create a new global reserve currency.
As people have less trust in fiat currencies - and especially in the global reserve currency - they will turn to a reserve they can access - like Bitcoin.
A striking example of what happens when people don’t trust their own currency played out this week in Zimbabwe.
Following the failure of Zimbabwe’s money system - first when Mugabe printed so many Zimbabwean dollars that its value dropped to zero, then when he switched to US dollars as the main currency only for it to now be in short supply - this week Zimbabweans buying Bitcoin have driven the price up via local traders to close to $10,000 per bitcoin - almost double the global price.
3) THE NEXT GLOBAL FINANCIAL CRISIS
In the same way that CDOs were already highlighted as a source of a crash before the 2007 Global Financial Crisis ten years ago, ETFs (Exchange Traded Funds) have now been highlighted for months now by the investment community as the likely cause of the next crash. They have ballooned since the GFC by 500% to $4 trillion, with $400 billion invested in the first 8 months of this year alone.
ETFs are passive but leveraged funds that grow faster than the stocks or assets they back - which is great in an up market. But the moment the market turns, this money will exit fast, rapidly increasing the speed of any downturn in all assets.
Allianz Chief Economic Advisor, Mohamed El-Erian said of ETFs “It is a huge risk of contagion. People are forced to do things they don’t want to do, and the next thing you know the real economy is at risk.”
Last month, BIS Chief Economist, Claudio Borio, added the next Global Financial Crisis will hit “with a vengeance.”
The result of all these warning bells, together with the increasing volatility of governments themselves, is leading more and more people to seek safety somewhere, and that somewhere for an increasing number is Bitcoin.
As Tom Lee said three days ago: “I think this next generation of young people view bitcoin as their store of value. And if it captures 5% of the gold market, it’s worth at least $25,000 per unit.”
He also added “In the short-term, we think bitcoin will reach at least $6,000 by mid-2018.”
It took just two days for the price to rise beyond that.
The market size for cryptocurrencies has grown by 800% in the last year. Just as people scratched their heads when adoption of the Internet grew at the same pace in the 1990s, hyper-growth may lead to a bubble but also may be the beginning of a new paradigm.
As governments begin to issue their own Cryptocurrencies (this month Dubai launched emCash and this week Russia announced their CryptoRuble), trust in governments and our current finance markets continues to fall, So don’t be surprised to see the value of Bitcoin and some of the other cryptocurrencies continue to rise - despite volatility and even big drops in the short term.
That doesn’t mean rush out and buy Bitcoin if you need the money for other things. But hopefully from this post you can see that the rising price isn’t simply the result of crazy people.
As for me, even as it hits its all time highs, I’m buying.
Because compared to multiple un-safe homes for money, it feels safer. Because I finally understand it better. And because I believe one-way-or-the-other, our current money system needs to change.
“I have invested in Bitcoin because I believe in its potential, the capacity it has to transform global payments is very exciting.” ~ Richard Branson