Unless you’ve been hiding under a rock (and maybe even then) you’ve certainly been hearing a lot about Bitcoin. Recently, it seems like you hear about bitcoin reaching a new high every single day (it surged to above $9,000 shortly after drafting this post). This price surge leads to more publicity which leads to more interest which leads to more people throwing money into it, further raising prices and continuing the cycle upwards.
With all the noise around bitcoin, I get asked my thoughts about it all the time. Well here’s the short version of my opinion:
Bitcoin is a bubble that’s going to collapse.
Now, bubbles, by definition, are unpredictable so Bitcoin could easily double in price over the next year or two before it collapses. Feel free to throw this post in my face when a year from now Bitcoin has jumped from $9,000 to $15,000, but, eventually, when the crash has occurred, I’ll get the last laugh.
Obviously I don’t have a crystal ball to see into the future, so nothing I say is guaranteed. This is simply my opinion, but here’s why I think the Bitcoin bubble is headed for an inevitable bursting.
Bitcoin Has All The Classic Signs of a Bubble
If you ever studied economic history, you’ve probably learned about the Dutch Tulip Bubble of the 17th century. Recognized by most economic historians as the first “official” investment bubble, tulips (yes, the flowers) sold for ever increasing prices, eventually reaching a point where in some cases a single bulb sold for multiples of someone’s entire annual income.
Eventually, when people realized these weren’t, like, magic bulbs that could make all your troubles vanish and were, in fact, just plain old flowers, they stopped paying ever increasing prices to acquire them. They realized the only reason people were paying ever higher prices for bulbs was because they thought the price would keep going up and other people would keep paying ever-higher prices for the bulbs they had purchased initially.
When the mania stopped and people realized they were paying way more than any reasonable estimate of the bulbs’ actual values, those left holding the flowers they had paid an arm and leg for, could no longer sell them for anywhere near what they paid and lost huge sums of money.
2 Key Reasons Why Bitcoin’s Rise is Unsustainable
1) No underlying economic value
A stock is an ownership share of a company. You literally own a (usually, very small) part of a (generally, very large) company. Sometimes we forget that fact when talking heads in the financial world talk about stocks like they’re horses at the track. But that’s a key fact about stocks that makes them, in general, a solid investment.
You’re not just buying stocks hoping blindly that you’ll later find someone to take them off your hands at a higher price. No matter how the price of a stock fluctuates in the short term, if that company is earning profits, your share of stock is generating cash for you in your share of that company’s profits.
When you’re holding a Bitcoin, it does not generate any type of income. The people that have been making money off Bitcoin’s rise simply bought it, held onto it for a while, then sold it to someone else at a higher price. Those that think Bitcoin will keep going up forever point out that Bitcoin is valuable because it will be the currency of the future, but that misses something crucial about currencies.
2) Bitcoin is not an effective currency
The most frequently cited rationale for Bitcoin’s meteoric rise is that it will be the currency of the future. Big in libertarian, anti-government circles, this line of thought says that as governments, like the U.S., manipulate their currency through Federal Banks they’ll become worthless as the general public realizes their money is subject to the whims of unelected government officials. The proposed solution to this problem is Bitcoin (or other cryptocurrencies) that won’t be subject to government manipulation.
The problem with Bitcoin as a currency is that it doesn’t do either of the things you want a currency to do. First, you want it to be easily transferable so that you can exchange it for goods and services. There are more and more ways you can actually use Bitcoin to buy things other than drugs and illegal firearms, but until you can pay your rent or buy your groceries with throughout the world, it won’t meet this test.
Second, you want a currency to hold its value over time. You want it to be stable, so that when you wake up the next day the amount of money you had will buy roughly the same amount of goods you’d had laying yourself to bed the night before. As much fun as it is for early Bitcoin holders to see their value skyrocket, you don’t want a currency to fluctuate in value widely.
A quote from a recent Wall Street Journal article summarizes this nicely:
Even with the decline, bitcoin is still up more than 500% this year and has a market capitalization of about $100 billion. The latest drop marked the fifth time this year that bitcoin has fallen more than 20% from a recent high, according to research site CoinDesk. Bitcoin recently traded about $6,250.
You don’t want a currency that drops 20% ever, let alone five-plus times in one year.
I personally do believe some kind of universal, “crypto” currency will become the primary form of money sometime in our lifetimes. But don’t believe the hype that Bitcoin is inevitably that currency and therefore it’s price should know no limit. That’s like saying in the early 90s that the Internet will be the future (which it was!) so therefore the early industry leader (hello Netscape!) is certain to skyrocket in price forever.
There you have it.
That’s how I feel about bitcoin. Feel free to throw some money into Bitcoin and watch it jump in price. Just be sure treat that “investment” like chips at a casino and make sure to cash out before the music stops and you’re left holding the bag (of Bitcoins!…that pun actually worked really well).
Want to learn even more about why I think bitcoin is headed for a collapse? There’s one bit of news coming down the pipeline that signals the beginning of the end that I’ll be writing about soon. Sign up for my newsletter below to be sure and get that post when it comes out soon!