Why is Bitcoin Soaring?
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Unless you live under a rock you've heard Bitcoin's price is soaring.
It’s tripled in the past year, briefly hitting $69,000, which Elon should like. It’s actually up 20-fold since the pandemic, when double-digit inflation was but a twinkle in Joe Biden’s angry eye.
Incidentally, over that period gold — the other main inflation hedge, and my monetary first love — almost doubled. Meaning Peter Schiff can finally afford nice shirts.
So what’s driving the Bitcoin frenzy?
In short, ETF's, the Bitcoin “halving,” and of course ongoing inflation.
Bitcoin to the Moon
Starting with the ETF's, Bitcoin is getting massive flows thanks to the new Bitcoin ETF's -- over $15 billion so far. An ETF is basically a container -- think of it like owning part of a bag of treasure. Most ETF's toss stocks in the bag or maybe real estate. Bitcoin ETF's contain Bitcoins.
This is a risk, of course -- you're trusting the custodian, the guy holding the bag -- say, Blackrock.
By the way, my lead sponsor Unchained.com offers an alternative where you retain custody of your Bitcoin. Basically a safety deposit box you can trade, borrow against, and put in an IRA.
Still, ETF's are easy for people if they're new to Bitcoin and don’t understand the importance of custody.
The ETF's turn around and buy Bitcoin with that money, and presto the price goes up.
The second factor is the so-called halving, where the number of Bitcoin produced per day cuts in half. This happens automatically every 4 years, think of it like half the gold mines in the world suddenly shut down and can never re-open.
This reduces the flow of new Bitcoin, which tends to drive the price up. Historically by a lot: about 2 to 4 times in the past 3 halvenings.
So if that happens again we could be looking at $100,000 Bitcoin.
Inflation on Bitcoin
Finally, the big one: inflation. Bitcoin was created by a programmer -- Satoshi Nakamoto -- who was obsessed with gold's role as a money. So he modeled Bitcoin to work exactly like gold.
Meaning it's free from government control, it has a limited supply, and its main value is a backup money in case government money dies.
This means that inflation makes Bitcoin act like gold, but a super concentrated version -- the ups are bigger, the downs are bigger. Hence these past couple years, with gold doubling and Bitcoin going up 20-fold.
Conclusion
Bitcoin goes up a lot, it goes down a lot. But the fundamental value is what degree it will replace paper money when that day comes. The other contender, obviously, being gold.
Gold, of course, has a long track record, but it's also easy for governments to seize, at least on the scale to run a gold-backed money. FDR did it in 1933, it'll happen again.
Meanwhile, Bitcoin cannot be seized, and you can basically email it. On the other hand, many people feel uncomfortable using a money based on software.
Still, if you think paper money will die, you might want to have some of both.
Final point: If you're new to Bitcoin go slow -- get like 20 bucks and goof around buying, selling, trading until you understand it enough to hold through the price swings. Otherwise guarantee you'll sell at the wrong time — many others have.
As for me, I generally own both. Because I know on a long enough timeline every paper money dies. This one included
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I think it is more a replacement of investments in real estate, bond & stocks rather than a replacement of a currency (i.e., real savings)... That said,
Good 'mental picture' explanation of the bitcoin halving:
"think of it like half the gold mines in the world suddenly shut down and can never re-open"
I can’t predict where bitcoin will end up in the short term, but I can’t say I am confident of its high long term value.
The appeal and fundamental reasoning for it having any value is pinned upon its limited quantity. Modeled after Gold or Silver which are finite resources. There are some big differences that exist for Bitcoin that do not exist for Gold or Silver.
Bitcoin has many potential substitutes. How many competing cryptocurrencies exist today? Hundreds, thousands, I really do not know the total. If some big holder of bitcoin wants to ramp up the price of a certain competing coin, all they have to do is move a large amount in a short time to coin x. Coin x shoots up in value as others pile in for the action and the original person or group sells slowly on the rise and later on repeat the process. I am sure this is happening now as price manipulation occurs in most all markets. The Fed can crash the price at any time by just buying huge amounts and withdrawing it quickly. This is the not the main problem though.
While bitcoin is limited in the number of coins, so are all other cryptocurrencies. It is more a matter of utility of the cryptocurrency that is going to determine which is used in the long term than any other factor. Bitcoin has the edge on utility as it ahead of most other competing coins, but its disadvantage in the long run is its volatility. As long as it is volatile it cannot really be used as a mainstream currency. As it has many competitors, it is likely that many other cryptocurrencies will gain their share of the pie as well. So while bitcoin has a limited number of coins, it also has a potential endless number of competing cryptocurrencies which long term kind of negates the benefit of limited coinage. As other cryptocurrencies gain utility what really makes bitcoin so special that it remains the dominant cryptocurrency? Cryptocurrency will go through a commodification process regardless of their individual limited supply because the total supply of cryptocurrencies and coins as a whole is virtually unlimited. To sum it up, the coins backed by nothing and limited supply not being of any practical value, means the price is eventually worthless.
I would put it in these general phases for bitcoin and similar popular cryptocurrencies.
The introductory phase which has already taken place.
The adoption phase which has also largely taken place but is ongoing.
The mania phase that started a while ago and is increasing.
Future phases could be:
Commodification phase where there is an increasing use of various forms of cryptocurrency.
Devaluation phase. The natural result of an increased commodification of cryptocurrency and coins.
It is my speculation that this form of cryptocurrency has a fatal flaw that cannot be resolved in the long run. However, that does not mean all cryptocurrency is doomed, but other forms will take its place.
Back to gold, silver and other hard assets. The biggest advantage of cryptocurrency in the long term is its utility as a replacement for currency.
If my first premise is correct, and that remains to be seen, cryptocurrency will have to be backed up by real physical assets. Simply because there is actual value in real world assets that cannot be negated. The other advantage is more price stability.
These assets can be gold, silver, and or multiple commodities. The market will figure out a proper combination. The concept of bitcoin is sound on paper, but it isn’t in real life because of competition that can duplicate the model over and over again.
You can’t create gold, silver, wheat or corn in unlimited quantities.
Smarter people than me have most likely already figured out as much and will play the game accordingly. Know when to cash in the chips and watch for the upcoming phases. There is still money to be made whenever a mania exists. The trick is to know when it is over before it is over. Not easy to do. Hedge your gains by putting some of them into tangible assets.
Don’t like being the guy pissing in the punchbowl, but there will be some spectacular losses for some and it is usually the average person, not the ones who are well heeled. They already know how the game ends and know how to play it.