Type “Bitcoin is a Bubble” into Google and you’ll get 31,800,000 results, a clear indication of how many times people have, incorrectly so far, called a top in the price of the worlds most famous cryptocurrency.
We’ve been studying it for years (disclosure: I wish I’d bought it when I first started looking at it) and have summarised our thoughts in a detailed report; “Bitcoin, Dollars, Gold: What is the Future of Money”
We see numerous potential tailwinds for Bitcoin, and for blockchain especially. Capital is flowing into the sector, millennials love it, and we also think governments and commercial banks are supportive of digital currency, as they have a general disdain for physical cash.
Blockchain’s potential to disrupt multiple industries is also another tailwind. For those who want further evidence of its potential, we suggest reading “Banking is only the Beginning: 30 Big Industries Blockchain Could Transform”.
Finally, for as long as central banks the world over engage in the monetary largesse we’ve become accustomed to in the “post” GFC environment, more and more people will look for alternative monetary solutions.
This is true not only in the developed world, but also in some of the poorer and worst run countries on earth.
We for one couldn’t blame a Venezuelan for wanting to be long Bitcoin rather than long Bolivar, and this continued monetary uncertainty will likely remain a tailwind for Bitcoin and cryptocurrencies for some time to come.
Tailwinds aside, there are plenty of ‘bubble’ warning signs in Bitcoin, and cryptocurrencies more generally today.
It’s not just the size of the move, but also the accelerated nature of the price gains that are cause for concern, whilst the proliferation of ICOs is a definite warning sign.
Indeed whilst disciplined investors look to the wisdom of Graham and Buffett, late to the party cryptocurrency enthusiasts are finding investment advice in the Instagram feeds of Hilton, Foxx and Mayweather.
Bubble dynamics aside, there are a number of other concerns we have when it comes to Bitcoin, which make us question whether or not it really is the future of money, as some of its evangelists claim.
In the first instance, we remain sceptical of the supposed ‘network effect’ of Bitcoin, which is one of the primary factors that crypto-enthusiasts discuss when making the case for Bitcoin.
Bitcoin may well be the best-known cryptocurrency, but that doesn’t change the fact that as monetary assets, both the US Dollar, and gold, have far superior network effects, which Bitcoin is not even close to replicating.
Apart from concerns about the real value of Bitcoin’s network effect, we also think investors are confusing Bitcoin’s potential as a payment mechanism, versus its potential as money itself. If we could draw an analogy, we think many crypto-enthusiasts are mistaking the pipelines for the oil.
Another issue is the concentration of ownership, with over 96% of all Bitcoin held by just over 4% of Bitcoin wallets.
Bitcoin forks should also be a major concern for investors, as they bring in to question the ‘consistency’ of Bitcoin. Any monetary instrument that lacks consistency is surely doomed to fail, as this is a fundamental prerequisite for a sound and widely acceptable monetary instrument.
We also remain unconvinced about the basic ‘use cases’ for Bitcoin, at least when it comes to engaging in what we might call meaningful commerce, with three hypotheticals (selling Bitcoin for fiat currency, buying a property in Bitcoin, or buying a car in Bitcoin) all coming up with major problems as far as we can see.
We also think that Bitcoin bulls will, by necessity, be sadly disappointed in its price trajectory if it truly is to become the primary form of money used in commerce, based on the historical long run real returns that gold has generated.
After all, economies would simply cease to function in any environment where money itself generates a greater return than enterprise.
Finally, whilst we are as supportive of free markets and competition as anyone, we find the whole idea of a world of competing cryptocurrencies absurd, at least if they are to be used as media of exchange and units of account. Indeed, taken to its logical extreme, the kind of world that crypto-enthusiasts imagine would in some ways be no more sophisticated than a barter system.
Access our detailed report on Bitcoin, Dollars and Gold here: (VIEW LINK)
ABC Bullion Chief Economist. Gold bull since early 2000s, have spent +20yrs working in investment analytics, research & portfolio construction. Author of two books on investing in gold and causes of the GFC. Lover of markets, competition & technology
Great article, If Bitcoin is money or equivilant or its competitor its hard to see Governments allowing it to be controlled by anyone but themselves. Could it become a world currency with its own exchange rate?? If its money can trillions be in a manner of speaking 'digitably printed' significantly reducing its value - I do not know. Is it possible that other organisations or countries will or can create their own versions of bitcoin. If is possible then watch out. If it is possible and no one is bothering then why? Does Bitcoin have patents or does it need patents?? Can anybody do it? If it really was a serious short term threat or alternative to doing business without traditional cash involved then I would imagine that some countries would be preparing legislation etc. What is bitcoin backed by? Seems like its backed by the parabolic graph alone? If we exchange $$ the recipient knows they are Government backed? Gold on its own has long established markets and increases in supply as it comes out of the ground. You could grow tulips. Can you make more bitcoin or maybe create a 'home label version'??? If Bitcoin is just a more secure version of say a 'pay pal' to pay bills then its really a 'so what's the big deal'.
Until the value of bitcoin is stable how can anyone use it for commerce? When it is stable in value, relative to other currencies, there will be less demand (the true demand?) from average Joe. At the moment it is like surfing a wave, enjoy it while it lasts.
More from Jordan please...