Bitcoin has just broken through the $60,000 mark. In one year, the price has increased elevenfold. Unbelievable. Speculation? Definitely. You would have to be blind not to see that we are facing a huge bubble. Tesla would almost seem like a bond in comparison. The cryptocurrency star had already followed an exponential trajectory until October 2018, before collapsing, losing more than 80% of its value in less than two years.
Speculation yes, but not only that...
However, considering Bitcoin as a simple speculative instrument is reductive. If its price has climbed so much over the past year, it is not only because of traders looking to buy expensive to resell even more expensive. There are in fact two major elements that have boosted its market value almost simultaneously.
First, COVID-19. Yes, it again. The Chinese virus has led to a simultaneous explosion of fiscal spending and liquidity injections by central banks. The increase in money in circulation initiated by governments and their central bankers has led to a devaluation of currencies and increased the risk of inflation in the more or less long term. To hedge, investors have rushed to assets that protect against these risks, including gold and its digital counterpart, Bitcoin.
At the same time (the simultaneity is almost disconcerting), the reward offered for mining BTC was halved. This is called "halving". This process helps limit inflation and increase the value of the cryptocurrency.
So on one hand we have a massive devaluation of classic fiat currencies and on the other hand a limitation of supply associated with an explosion in demand. All the ingredients were reduced for Bitcoin to take off.
Zero intrinsic value?
Steve Hanke, an economist at Johns Hopkins University, recently said that the flagship cryptocurrency will soon return to its true intrinsic value of zero. According to him, the income streams generated by BTC are zero. “It’s not like money. Most fiat funds have fundamental value because they pay interest. ... Bitcoin doesn’t pay interest.”
The comparison with money is quite disconcerting. Indeed, most fiat currencies no longer pay or almost no interest, when they do not tax negative interest... Reducing the intrinsic value of BTC to the sole payment of interest is also questionable. If the cryptocurrency does not pay royalties, the fact remains that its credibility is increasingly recognized by the big players in the market. Tesla, Paypal, Mastercard, JP Morgan, Morgan Stanley and Deutsche Bank have all expressed their interest in this virtual currency. Some have even already taken action.
An asset does not have intrinsic value just because it pays income. Gold does not pay any income, for example. The value of gold is based only on the trust that those who trade it are willing to place in it. Its advantage is that its supply is limited, it is recognized as a means of exchange and it is easily tradable. Exactly like Bitcoin. It is not for nothing that the latter is sometimes called "virtual gold".
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The other advantage of Bitcoin is its lack of correlation with all other assets, including its real cousin, the yellow metal. In this sense, it also shares one of the characteristics of gold. Thanks to this very particular quality, BTC allows you to optimally diversify a portfolio, thus reducing its risk, while preserving or even improving its performance. However, its significant volatility should be taken into account in the way it will be weighted in the portfolio. My book will give you some leads to follow on this subject.
Conclusion
There is no denying that Bitcoin has a strong speculative characteristic. But the crypto star is not just about that. When a price goes up, it is because demand is high and supply is not keeping up. With the crypto star, we are in exactly this pattern, and not just because traders want to make short-term gains.
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It's hard not to think it's a bubble, but the more time passes, the less I continue to think so.
On the one hand, because there is a strong recurrence (3rd occurrence), of this same pattern of large price increase after the halving, which has been widely studied (given that with the blockchain we have free access to a lot of information on purchases and demand).
This recurrence shows us that bitcoin follows an adoption law, and that halvings create a supply shock that causes the price to rise explosively a few months later.
As long as bitcoin adoption continues, this phenomenon will continue. Today, it is estimated that about 1.7% of the world's population owns bitcoin. This has a good chance of continuing until the next halving or even the one after that.
On the other hand, what makes me say that it is not a bubble is the fact that institutions are interested in it this year, certainly to speculate and trade, but also as a reserve asset (purchases of Microstrategy, Tesla, etc.) which rather plan to use it as protection against potential inflation.
When you look at the price chart on a linear scale, it seems to be highly emotional, and it looks exactly like a bubble. On a log scale, you can really see the halving cycles, and the "madness" that follows. But over the long term, we are still on average on an annualized progression of 200% over 10 years.
So is it a bubble? In my opinion, not yet
There are bubbles and bubbles. There are those that burst definitively and those that inflate even more. Amazon was also in a bubble situation in 2000 and J. Bezos is today the richest man on the planet.
I think bitcoin is closer to Amazon than JDS Uniphase….
Thank you for this article which starts badly but ends well in my opinion. Yes I share the opinions of the comments and by dint of documenting myself I am more and more convinced that it will supplant gold as a "store of value". We are still potentially at the very beginning of a revolution whose consequences we cannot imagine.
Exactly! "Traders want to make short-term gains." and I think that's where the problem lies. I have a friend who keeps trying to convince me to invest in this currency (it's starting to get annoying after a while!). But he's day-trading! It exhausts me to have to follow this daily, when I invest I try to do it over a 20-year horizon. And when I look at the health of my portfolio, I wonder what more bitcoin would bring me... To buy a Tesla? hmmm no thanks, it wouldn't respect my life plan to have a car that costs me an arm and a leg to maintain every semester and stress me out with parking in the snow!
In any case, I stick to Warren Buffett's advice:
1- Respect my knowledge (I don't understand anything about BTC and I don't give a damn either)
2- Invest for the long term (Will BTC perform as well as the S&P500 over a 10-year horizon? In all probability, no. If I'm wrong, too bad! If I had invested all my money in Amazon 20 years ago, I would be a billionaire too!)
3- Stay away from the madness that comes with market fluctuations
4- Be PATIENT!
Either way, BTC is following the same exponential trajectory as the stock market or the real estate market. When things really go bad, BTC is going to take a hit like everything else….
It seems to me that BTC has become an asset like any other. Or at least not far away. At first it was just a geek thing that no one understood. Now it is starting to be recognized. Like any asset, it is not immune to speculation. However, like any asset, it can also be used in a portfolio for an investment approach.
I was resistant to BTC for a very long time. I changed my mind the day I discovered its total lack of correlation to other assets. A small line of Bitcoin is therefore very appreciable in a portfolio. Not to speculate, just to diversify and paradoxically reduce the volatility of the portfolio.
It's definitely not the goose that lays the eggs. It's not the devil himself either. It's just an asset with all that implies.
What we also need to see is real inflation. With monetary and credit policies there is in fact a very significant expansion of the money supply. If we do not only count a few consumer products but if we include in the calculation the value of assets (real estate, stocks) "asset inflation", then we see that there is real inflation that some estimate at 15% / year. This is huge. Hence the interest in BTC which escapes the control of central banks and is designed on the principle of scarcity with inflation known from the start and very low. With real inflation at 15% per year, we can be a very good stock picker and still see our capital melt if we do not manage to exceed them.
Bitcoin is worth 0 not only because of the zero flow story, but also because it is useless. Unless you are from the Russian mafia and you need it to ransom companies when you hacked their IT tool.
It's hard to agree when you have it and you believe in it. But fundamentally, it's worthless. It's pure speculation. Tomorrow, you'll wake up and say to yourself: "But what am I doing with my money in this!" It may be too late.
It's exhilarating to be part of the party. It's exactly the same feeling when it's midnight at a big party where everyone is drinking: crazy atmosphere! Unfortunately, the next morning will arrive. Like a hangover until the evening...
No serious person includes virtual currency in their assets, unless they are a gambler. And then we are in a casino-type approach. Which has nothing to do with investment. It is still necessary to recognize it and be aware of it.
Individuals have too much money. They have time and no activity: they speculate with the products that are offered to them. If Deutschebank and Goldman Sachs are getting involved, it is to collect commissions and palm off products to individuals. They would be wrong to deprive themselves of it given the current appetite of speculators for this type of risky product!
This new paradigm, we already heard that in 2018 when all assets were overvalued. Then, we didn't hear about cryptocurrencies anymore... until a few weeks ago. An epiphenomenon that is destined to disappear in the history of assets.
Around 2018 I think, I became interested in Bitcoin, its history and how it works, the Block Chain behind it, and what makes its price vary (yes, yes, supply and demand of course; but what makes them vary?).
I bought some for a few cents, just to experience what it was like to buy something.
In the end, I stay away from it, out of caution, because, even if I am willing to conceive that it could become a sort of "digital gold", i.e. a safe haven, I still do not have confidence in this virtual currency, many of whose parameters escape me, despite my efforts to study and try to understand.
So, as it stands, Bitcoin and other virtual currencies are without me. But I am aware that I may be missing out on something.