– Bitcoin tops $10,000, soaring more than 850% since beginning of 2017
– Irrational exuberance arguably main driver of price performance
– Google Trends shows search for ‘Bitcoin Bubble’ hit highest level this morning
– Buyers need to be aware of hacking and security risks
– Other primary risks to widespread adoption is volatility and liquidity risk
– World’s largest online trading platform IG Markets suspends BTC trading
– Volatility of cryptocurrencies and risky world of fiat make gold attractive
Bitcoin topped $10,000 on some exchanges yesterday to much fanfare and animal spirits internationally.
With a 850% surge in less than a year, bitcoin has seen gains that are four times more than dot-com stocks gains at their height in the late 1990s. This is making the first and arguably the best cryptocurrency look like it is an ever-growing bubble which will no doubt hurt many speculative punters when it finally goes ‘pop’.
Bitcoin’s market cap is over $160 billion and more than that of General Electric, a company that has been in existence since 1892 and has nearly 250,000 employees.
When you look on Google Trends and see the search for ‘Bitcoin Bubble’ reach a peak as the price probes $10,000 then you know that many owners and non owners of the cryptocurrency are beginning to get worried. Although a contrarian might say that the widespread concerns of a bubble mean that we may be in the early stages of the bubble.
Bitcoin has many factions concerned. Central bankers are worried about its impact on financial markets, merchants are confused if they should be accepting it or not, exchanges are terrified they’ll get a large sell order and some gold investors are even wondering if they should have invested in Nakamoto’s invention rather than the world’s oldest form of money.
Jitters are seriously beginning to show and yet the price keeps climbing. However high price does not necessarily equal validation. High price in this case is partly a sign of irrational exuberance. It is a sign of a market that is playing a short-game, blinkered by the mounting risks to which the bitcoin and cryptocurrency markets are exposed.
Dr Constantin Gurdgiev, finance professor, respected market commentator and former non-executive adviser to GoldCore warned of a speculative bubble:
…at this point in time, bitcoin price can be potentially driven solely by expectations held by its enthusiasts, plus the incentives by the predominantly China-based investors to avoid extreme risks of capital controls and expropriations. If so, both drivers would make it a speculative bubble.
The problem with bitcoin is not that they are worth nothing. They are clearly worth something, if anything just because of the work that goes into creating them but also because there are people willing to make an economic exchange for them.
The problem with bitcoin is that while adoption is surging, it is still amongst a tiny section of the population – primarily the tech community and millennials. There are varied estimates but is believed that some 0.01% of the world’s population holds a bitcoin wallet (not even bitcoin as many have wallets and accounts but have not bought).
The case for its potential is utterly compelling but it is as yet unproven with many potential competing digital currencies – state and private.
So what we are left with is a cycle of irrational exuberance, speculation and FOMO (fear of missing out).
There is some value to bitcoin and the tech is excellent and compelling. The dot com bubble did not burst because dot com stocks were completely useless, it burst because everyone became overexcited and a highly speculative “get rich” scheme. The same can be send for tulip mania.
As evidenced by our publishing and trading online and the growth of social media and e-commerce in recent years, there was some value and great tech in the dot com era. The same will be seen with bitcoin, but most likely once the bubble has burst and the FOMOs have scarpered and moved onto the next great think … possibly gold and silver bullion. Only then will we see it’s true potential.
As Michael J.Casey explained, the current bitcoin market has the hallmarks of a bubble now because of its immaturity. It needs to grow up quickly in order to move past this bubble phase.
The problem I have with the immaturity of bitcoin’s investing culture is not that it’s setting the market up for a correction. It’s that it constrains progress toward attaining the technology’s more fundamental social value.
Speculation is unavoidable, even useful in bootstrapping innovation. But if bitcoin is to change billions of lives, it needs to become a more mainstream asset class, one that’s connected to the real world that those people occupy. As much as we might all love this quirky, abnormal “honeybadger of money,” bitcoin needs to become more normal.
It needs more stability. It needs a two-way market.
The lack of a two-way market means there is increased volatility and a significant lack of liquidity. This can even create security risks for even the most professional of platforms.
On Monday IG Group told the Financial Times it had ‘suspended trading of some of its bitcoin derivatives on Monday after roaring demand for the products left the company facing a high security risk.’
This is an asset-class which does not have years of data for analysts and investors to find support and understanding for their trading decisions. This makes the market nervous especially with such low liquidity. Hence this is a speculators game at present and one which makes even the most professional of platforms run scared.
Should gold investors be crying themselves to sleep?
Inevitably, bitcoin’s performance results in many commentators declaring that gold is dead and bitcoin has replaced it. This is only based on the cryptocurrency’s price action. In reality there is little to compare between the two.
If the bit