BITCOIN BUBBLE TALK

There has been a lot of “bitcoin bubble” talk recently – seems to happen each time a cryptocurrency rises in price, at least from what I can tell.  So, I’ve been putting together a list of opinions from those in the cryptocurrency space to try and determine what the majority believes is happening – are we on the verge of another bubble point?  If so, are we in the early stages of a bubble?  Is this the beginning of a new boom phase, as some are predicting?  When might this “bitcoin bubble” burst and how do I manage my investment?

From what I can tell, the recent huge gain in bitcoin rates might be due to several factors…

1. More traders entering the markets, especially in Japan, South Korea and India
2. More institutional investors coming into the Bitcoin market
3. More awareness by the “real world” and a decreased fear of digital currency
4. Recognition of Bitcoin by governments such as the Philippines, Japan and Australia
5. Increased market confidence as the price continues to grow quickly
6. Growing concerns over economic conditions in general

Many feel that if the scaling issue can be resolved by activating SegWit as a solution, the price of bitcoin will continue to rise to yet another new “all-time high” – perhaps peaking around $3,000 to $4,000.  At that point, it is felt that a correction (decrease) might occur over the next year, but that it would be a smooth vs. brusque drop back down in the the low thousands range.  And there are some that feel that the scaling issue and delayed implementation of SegWit is all that is keeping bitcoin from surging to $3,000 or $4,000 – with new interest by individuals and institutional investors causing an organic rise in value vs. creating a “bitcoin bubble”.

There is some talk that trading crypto-currencies has become the new trend of investment for some, especially in regards to altcoins, and especially in regards to trading in Japan.  One bitcoin analyst, Koji Higashi, was quoted as saying “Another thing to note about this new trend is the general lack of understanding or appreciation of the technology by many of new users. This is no surprise and all of us have been there at one point, but the new wave of Japanese investors seem to be exhibiting a whole new level of incomprehension and misguided decision making in my opinion.”

I must say, I can see that being a factor – as there are many new traders who are probably buying certain altcoins based on the headlines and the fact that the prices are rising.  Ripple and NEM are currently the two most popular altcoins being traded in Japan – and both are very different in purpose and origin of value than bitcoin.  How many understand those differences, or even that there are differences, is anyone’s guess – but I would guess it could be a high percentage.

Bitcoin bubble or not, since July of 2010, Bitcoin has significantly outperformed the Japanese yen, Canadian dollar, Euro, Silver, Gold, US Dollar, bonds, global stocks, US real estate and US stocks.  It is only natural that bitcoin’s decentralized nature, high liquidity and transportability appealed to a wide range of investors seeking alternative assets to protect their wealth with a long-term investment.  Unlike gold, Bitcoin can sustain or increase in value over time because there is a fixed supply.  If a massive supply of gold is found – such as China’s largest gold mine to date discovered in late March – then gold could become inflationary in terms of supply, which could affect its mid-term value.  Even more attractive is the fact that Bitcoin’s ownership is portrayed with the utilization of cryptography – thus, bitcoin cannot be seized by a controlling entity because the Bitcoin network itself is decentralized and unalterable.  There is also the component of the settlement network – which gold fails to offer.

You have to admit, while bitcoin and gold are considered prominent stores of value and safe haven assets – over the past seven years, bitcoin has experienced a rocket-rise in terms of market cap, user base and value – while gold has failed to live up to expectations of investors.  A bitcoin investor who bought $10,o00 worth of bitcoin in 2010 would have earned $201 million.  While a gold buyer of $10,000 in 2010 has experienced a negative return of $9,981.  So, the fact is that gold has failed to see an increase or sustain its value over a seven-year period.  From my view, that makes bitcoin a better alternative – certainly for a portion of one’s portfolio!

Past Bitcoin Bubbles

Because I am ever-learning about the digital currency space, I wanted to take a look at the four noteworthy bitcoin bubbles in its life – times when the price exploded after rising slowly.  The first occurred on July 12, 2010 after an article about Bitcoin v 0.3 appeared on the then-popular news site, Slashdot.  There was a flurry of new bitcoin users, and “The Bitcoin Market” exchange’s bitcoin price jumped from $0.008/BTC to $0.080/BTC in five days – and it quickly settled to $0.06/BTC.

Bitcoin’s price peaked again on June 8, 2011 reaching a new high of $31.91/BTC, however it quickly dropped off and started a slow decline for a decrease in value by 93% over the following four months.  The next bubble came in April 2013 and, just prior, the US Financial Crimes Enforcement Network (FinCEN) had issued guidance on digital currencies March 18.  The following day, a new Bitcoin v. 0.8 was released and the price increased above $30 and the market cap of bitcoin went to a new high of $1 billion.  The price continued to rise, exceeding $100 for the first time ever, reaching a new high of $266 – and soon crashing to under $60 before settling around the $120+ range.

Following months of a pair of trading bots (Willy and Marcus) who faked volume at MtGox, speculation grew rampant and bitcoin’s price skyrocketed to the all-time high of $1,242 in November 2013.  Users soon discovered they could not withdraw any money from MtGox, while the price dwindled down to $0 by end of February 2014 – even I heard about that one.

Unlike the previous times, there were three additional USD exchanges when the MtGox bubble burst – prices at Bitstamp, Bitfinex and BTC-e took a big hit but never fell to their previous lows, and users could make withdrawals.

The Next Bitcoin Bubble?

I found an interesting blog post by Michael B. Casey, “Bitcoin enthusiast, data and analytics geek” and Sr. BI Developer at GM, from Dec 27, 2016.  Purely speculative in nature, his arguments compare bitcoin price charts to Fractal mathematics, the Gartner Hype Cycle, and the S-Curve.

Basically, Casey claims bitcoin bubbles mostly follow the hype cycle “because the nature of bitcoin investment is almost entirely speculative.  Speculation is driven, in large measure, by hype.”  In the article, he noted that we are currently in a phase where the price gradually makes its way back up to the old high price and that “once the price reaches a sustained level of 80-90% of the old peak, the bubble cycle typically starts over again with another bull run”.  Following much analysis, he says “I anticipate we have one more plateau”, which he felt would be around $900, and further speculated that “at present, all technical indications are that we are several months away from a new hype cycle and bull run.”

Some feel that the rise in price is not yet a bitcoin bubble because the market dynamics are very different, with many more exchanges, bitcoin usage, political considerations, economic stress, and lack of traditional investment opportunities.  There’s also the fact that nearly every global bank is experimenting or investigating blockchain technology based on the potential cost savings and efficiency improvements. The banks seem to be looking at the tech in a variety of different ways – like building in-house solutions, partnering with fintechs, or forming global memberships.  New trends are likely to emerge over the next several years that will be important to the success of banks implementing blockchain-based solutions.  It’s possible this new interest on the part of banks is generating some hype that is helping drive up the price of Ripple (XRP) and other altcoins that have different purposes than Bitcoin.

Of the past four large bitcoin bubbles, one delivered a decline as much as 93% – so any real investment strategy involves knowing the potential downside of an investment.  If everything is seen as upside, then it’s pure speculation.  Investment means you hold onto it for years to reap the benefits of appreciation and dividends.  So, is the current rise in bitcoin another bubble?

Apparently there are five major features of a fully inflated bubble, and Vikram Mansharamani who wrote a book about identifying bubbles, says the bitcoin market exhibits fewer than two of the five.

What’s Driving the Price?

Bitcoin appeared in 2008 – just as the global markets were crashing, the U.S. dollar tanking, and the Federal Reserve about to launch that first round of quantitative easing and flood the market with trillions in U.S. Dollars.  Along comes a currency that doesn’t need a bank, doesn’t rely on the Federal Reserve, and doesn’t care what the global reserve currency is – what’s not to like?  Bitcoin is certainly more attractive than a fiat currency that can be seized, as Cyprus did in 2013 when it snatched 10% of all citizen’s savings and deposits.

That can’t happen here – you say? What about gold? In 1933-34 during the depth of the Great Depression, the U.S. government decided to seize the gold holdings of the American people.  Executive Order 6102 signed by Franklin D. Roosevelt on April 5, 1933 gave American citizens (that were in possession of gold coins, bullion, and gold certificates) less than a month to turn it in to any Federal Reserve Bank or member bank of the Federal Reserve system.  At the time, the U.S. dollar was tied to the value of gold, so the U.S. government thought confiscating gold was a great way to protect the dollar. Ended with the U.S. dollar devalued by around 40%.

But that was then. What about now? Until 1975, it was illegal for Americans to own gold, unless it was in jewelry or collectors’ coins.  So don’t think for a second the government can’t and won’t do whatever it wants.  Whether the Federal Reserve prints off trillions of dollars, manipulates interest rates, or even lowers them to negative rates – whatever is needed to “help” the economy will be done, regardless of the impact on you or me.

So, you might say, Bitcoin was born out of fear – and that it may be the perfect way to store value.  Based on the incredible rise in bitcoin (and altcoin) prices, it seems more and more investors are looking for a better place to park their wealth.

Will Bitcoin Remain Bullish?

So, in 2017, will bitcoin’s true value shine at a time when the traditional fiat monetary regime appears to be unraveling? Like the stock market, which is at record levels, will bitcoin (and altcoins) remain bullish because investors are afraid of losing out?  Would a stock market correction or crash send Bitcoin soaring? If global tensions already at critical levels boil over, will investors protect their assets with Bitcoin?  Will a trade war with China, Mexico or any other majority trade partner send Bitcoin soaring?  What about some black swan event that catches the stock market and currency market off guard?

With so many potential catalysts in Bitcoin’s favor, it’s not surprising that many support a bullish Bitcoin price prediction in 2017.  Should the spread between gold and Bitcoin volatility rates continue to depreciate to within acceptable long-term limits, Bitcoin will appeal to a larger investor pool interested in holding it long-term, rather than just trading it – a gap that is slowly getting filled.  Another factor driving a favorable outlook for bitcoin is the critical mass of acceptance that cryptocurrencies have achieved recently. It seems that questions of whether blockchain technology is of useful relevance in the world of finance have been answered.

For whatever reason, and there are several from which to choose, now could well be the best time to start acquiring and trading bitcoin.