Bitcoin is a Bubble

My current long term issue with bitcoin is abnormally high percentages of the coin being bought with the belief that another person will come behind them to purchase the virtual currency, therefore generating more demand and further driving up bitcoin’s price. It’s creating value and demand only from the coins scarcity.  This trend or crypto craze has the makings of a epic bubble, similar to tulip bulb crisis in regards to scarcity and demand. Another more modern example would be the laughable beanie baby craze as for the tulip bulb crisis of the 1630s it was a bubble created in Holland when tulips were first imported into the country and generated interest as an imported novelty. Scarcity of the tulips along with the demand created absurd rapid rising prices which got so ridiculous that tulip prices had a near 20-fold value increase in one month. People willingly traded estates and life savings for just a few bulbs. The belief behind this craze was that once purchased, the price would further increase and they could trade for more assets later down the road. This created value of an asset based solely on speculation and once people started to sell their tulips… well, the domino effect kicked in with sales progressively leading to lower and lower prices and eventually, a complete nose dive crash which brought down the economy.

“The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. But a pin lies in wait for every bubble. And when the two eventually meet, a new wave of investors learns some very old lessons: First, many in Wall Street – a community in which quality control is not prized – will sell investors anything they will buy. Second, speculation is most dangerous when it looks easiest.” – Warren Buffett, Berkshire Hathaway year 2000 shareholder letter.

In the similarity of the tulip scarcity there are only 21 million available bitcoins, with a rough estimate of about 11 million having already been found, in use or mined. We will get around to issues with mining later in the article. Another current dilemma is that bitcoin is not real money and nor does it have any reliable value. Due to it’s wild price fluctuations it can’t attract payment processors such as PayPal and Square. How can you accept a currency that very recently lost almost of third of its value in one day? If I have one bitcoin and its value is $100 and I need to buy a $100 dollar item, but the value of my one bitcoin drops to $90… how can I purchase that item?

The fluctuations will also prevent stores or vendors on the same pretense for accepting bitcoin. If their item is sold for one bitcoin valued at $100 and then the value takes a dive, the store just lost money in the transaction. Another issue with bitcoin is that most of the “good news” has already been priced in, i.e. a 1,500 percent increase in value on at least one exchange reaching a new record near of $20,000. This type of wild short-term growth in any stock asset or currency has historically proven to be due for a collapse.  Also I would like to state that the Washington Post just ran a front page article on the soon to be collapse of the cryptocurrency craze.  Who owns the Washington Post?  The answer to that is Jeff Bezos, the CEO of Amazon, which is the largest online realtor.  For Bitcoin to become so-called real money they absolutely need to be accepted by Amazon.  Judging this using the recent edition of the Washington Post, there is little remaining chance of bitcoin getting acceptance from major online realtors.  

The biggest challenge to virtual currency, especially bitcoin, is it’s overall inability to become real money. The failure of an asset to be traded in for real money renders it worthless, again if we go back to the speculative nature and volatility of the currency it has left vendors and payment processors wary of bitcoin. Hence the pin to the bubble. Bitcoin is really just a very effective method of anonymously transmitting money, but also a physical check is a method of transmitting money. The question to ask is the paper check itself worth something or does it has value just because they can transport your money?

Bitcoin is losing its dominance of the cryptocurrency market share as other similar currencies come into existence (warning these new currencies are almost entirely complete phonies). As of December 27, bitcoin only holds a 43 percent share of the crypto world versus it’s previous almost 100 percent share of the crypto market in 2014. These new cryptocurrencies are being issued in similar fashion to blind pools, there lies no regulation or purpose and little information on whose behind the new coin offering.  They are complete pump and dump schemes that every prudent investor should stay away from.  

If the previous warnings weren’t enough, power usage has become an enormous issue with bitcoin miners as they currently are responsible for estimates of .15 of world’s power usage. The whole online Visa credit network (not including physical offices) usage is 1/3000 of that of the bitcoins network and you can actually buy things with Visa. As miners progress from the current 11 million discovered coins toward the cap of 21 million it will become progressively harder to mine and require more energy. This is eventually leading to a situation where bitcoin miners could clash with governments and other entities as they quickly become large scale energy users.

Also there lies the ability to completely lose your wealth via hard drive damage along with recent large-scale hackings and multiple exchange bankruptcies.  Just a few weeks ago NiceHash, which is described as a bitcoin mining marketplace, was hacked and had around an estimated $70 million stolen.  Since there is no central governing body behind the coin, you won’t be able to get it back if its stolen.  Also another concerning trend in crypto ICOs is stemming the recent BitGrail scandal.  BitGrail is an italian cryptocurrency exchange and last week the company released a statement saying “internal checks revealed unauthorized transactions which led to a 17 million Nano shortfall, an amount forming part of the wallet managed by BitGrail.”  The person who runs the exchange under the nickname of Francesco the Bomber claims the company is currently working with authorities for an investigation.  Regardless of the outcome of this so-called investigation, the investors in Nano tokens will never receive compensation for their investment.  That $170 million is gone with whoever took it and the main suspect is the person running the exchange himself.  In order to enter a crypto wallet, one must know the access codes of each wallet.  This information could easily be gathered by the individual running the exchange and due to a lack of traceability these coins can disappear.

Lastly, I would like to state that the currency came into popularity because of three factors: lack of traceability, criminal activity and money laundering.  Those three are the core of bitcoins initial demand and popularity.  To create a governing body behind the coin would evaporate bitcoins core demand.  Any regulation would drive out the individuals that use the coin for anonymous transactions, criminal enterprises and money laundering causing the demand to drop and therefore bursting this already very fragile bubble.  

3 thoughts on “Bitcoin is a Bubble

  1. Jim, You pegged this perfectly, I believe. I have listened to five “experts” trying to explain what Bitcoin is and how it works. All five haven’t a clue and are just trying to perpetuate the sizzle. There are going to be a lot of people hurt on this scam!!

  2. With almost everything that appears to be developing within this subject matter, a significant percentage of perspectives are actually rather radical. Having said that, I am sorry, because I do not give credence to your whole strategy, all be it exhilarating none the less. It appears to everybody that your commentary are generally not entirely justified and in reality you are yourself not really totally certain of the argument. In any event I did enjoy looking at it.

    • When I posted this article on Jan 7, 2018 bitcoins price was $14,976.17. Today (March 9th) it’s price is $3,928.19. I was certain of my argument when I posted it and since then, I have been justified fully.

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