Today I want to touch on Cryptocurrency again. This time I’m going to focus on sustainability of the crypto markets, rather than my usual discussion of Blockchain applications. No links today.
Just about all of you will have been seeing the headlines around the growth in the Bitcoin price. As I write this, Bitcoin is sitting above USD$10,000 and is showing growth of 1,260% over the last year. I have a modest amount of Bitcoin that I acquired well before the price run, and have some other coin holdings. I’m obviously happy enough right now and kicking myself for not investing more deeply.
That being said, where is this going?
I’m going to be up front and say that the Bitcoin price is imaginary. That’s not to say that there’s not value there, but the value is really an on-paper value with little substance. The value will keep climbing, and I expect that it will crash horribly at some point. I have three main reasons for thinking this.
My first reason for the above two statements (growth and crash) is related to the anonymous nature of the network and how that impacts markets. There are many large entities out there that have expended a huge amount of resources to amass Bitcoin. The criminal underground and others trying to avoid traditional banking scrutiny have been front & center. This has ramifications.
Most people confuse the crypto market with stocks. They look the same, and we see the same kinds of price charts, however Bitcoin has no real regulatory oversight or ability to scrutinize the people / entities that are moving the market. Bitcoin is not anything like the purchase of a share in an ongoing commercial business venture. Inevitably, there is a HUGE incentive for Bitcoin players to ‘pump’ the market and there’s seemingly zero ways to identify or deal with this. These players will use a small portion of their funds to repeatedly buy Bitcoin at the high side of the market. Perhaps they will even be (effectively) selling coins to themselves. The overall movement in the Bitcoin price will more than compensate them. As the market moves, real investors pile in, and these market-pumping players can build cash stockpiles at highly inflated prices. I would venture that this is actually the central driver of Bitcoin ‘success’ and it will not go away soon.
My second thought is around Bitcoin itself and how thoroughly flawed it is, technologically. The Bitcoin network has been on the edge of collapse for a long time. It is fundamentally unable to handle high volumes of transactions and needs to be thoroughly re-worked. No more than a tiny fraction of a percent of global use of currency could move over to Bitcoin as it exists. It’s possible that it will have some kind of supporting role, storing value (like gold reserves), however more nimble, modern, blockchain / ‘proof-of’ coins will necessarily take a lead day to day role.
My final angle on Bitcoin is simply around governments and government controls. Bitcoin has been a cute experiment on the edge of the ‘real’ movement of currency and value. Governments will not allow this experiment to become central to life, unless they have some way to track (and tax) usage. China has already been taking clear steps to address this lack of control, and I would expect that to spread in time.
These seem like famous last words that might come to haunt me, but my view is that Bitcoin will keep climbing then crash so horribly and spectacularly that it will send shockwaves through the more traditional markets. The main question for me, is how long the climb will last and how high it will go. That is, unfortunately, not something that I can predict.
Enjoy your weeks.