Bitcoin isn’t a bubble – in fact, it’s just getting started
Bitcoin recently hit $10,000 (£7,400) and many people are wondering if this is a bubble. On the one hand, $10k is a big round number that in the past has caused the bull to stall. Consider that $1, $10, $100 and $1,000 all saw price corrections. It would be unsurprising to see $10k as an opportunity to pause and reflect.
It’s important to remember that the price of Bitcoin is up 10 times in 2017, and the network behind it has grown 11 times. Given that the price of Bitcoin is directly proportional to the size of its network, the price has slightly lagged the take-up in this new digital asset. At Newscape, we track the fair value of digital assets and the current fair value of Bitcoin is $11,062. So there’s no bubble in my opinion.
We believe Bitcoin trades at a slight discount to its fair value as the level of network activity would justify a slightly higher price. For the price to fall, the size of the network must contract. It has done that in the past, but given that Bitcoin is entering the mainstream, I would question whether this would be significant.
In my opinion, a network contraction would more likely come about because a new and improved network takes its place. That remains entirely possible. The Bitcoin network sees $2bn change hands each day. That is massive compared to a few years ago, but nothing compared to what is possible. Furthermore, there are attempts to improve the efficiency of the network and give it greater scale. When that happens, the sky’s the limit, which makes Bitcoin a dangerous short.
Consider that the internet has been extremely successful in disrupting the likes of media, retail, information and communication. Bitcoin is an attempt to take on the world of finance and money. A bet against Bitcoin is to believe the internet will fail in the quest to exchange value.
Of course the ultimate winner in this new digital asset class may not be Bitcoin at all, as it may not have even been invented yet. Facebook and Google, and many like them, were latecomers to the dotcom boom. However, just as AOL was a great trade in the late Nineties, Bitcoin along with Ethereum are the best ways to capture this mega-trend today.
Some investors are sniffy about Bitcoin’s lack of pedigree. It came from the underground and libertarian world of computing known as the “cyber punks”. And it is popular in sensible circles to give blockchain a nod of approval, while spitting blood on hearing the word Bitcoin. Yet perhaps the only true application for blockchain is Bitcoin. And given the space has created over $250bn of value, that deserves some respect.
To understand Bitcoin as a financial asset, rather than code, it is worth considering what drives it. Bitcoin was designed around the idea of gold yet, economically at least, they have practically nothing in common, and here’s why.
If you have your doubts, steer clear. But it’s still worth taking the time to understand this space
On the supply side, it is true that gold and Bitcoin both have limited supply. The current rate of supply of new coins is around 4.2pc per annum; a number that will tend towards zero over the next century. For gold, 3,000 tons per year are mined and that increases the above-ground gold supply to around 1.2pc of the current level. But on the demand side, things are very different.
Gold is a long-term store of value. If the financial system comes under pressure and gold’s liquidity dries up, its value remains. In other words, gold’s long-term value is only loosely related to trading volumes or demand. Instead, its price can be explained over the long term by the level of inflation. Gold holds its value whereas money does not.
For Bitcoin, the value is proportional to the size of the network. And in that sense, it behaves just like a social media stock. The more people that use it, the more valuable it becomes.
Consider that if you bought $100bn of gold, people would be jealous of your obscene wealth. Yet if you bought $100bn of Bitcoin, they’d laugh at you. That’s because the value isn’t in Bitcoin itself, but in the network that brings people together to exchange value. No network means no value, and a vast network means the opportunities are vast. I am a fan of both gold and Bitcoin for completely different reasons. One makes you rich, while the other keeps you rich.
So should you buy Bitcoin? Remember, investments such as Bitcoin can go down as well as up and you may not get back your investment. If you believe the internet will be successful in exchanging value without centralised institutions such as banks, then you should buy it. If you have your doubts, steer clear. But regardless, it’s worth taking the time to understand this space.
Most importantly, you need to consider whether you’re right for this space. There are three important criteria. First, you must have an understanding or an appreciation of computers and what they are capable of. Second you should have an understanding or appreciation for finance and markets, and probably a curiosity about what defines money.
And finally, and most importantly, you need to have a sense of humour. Digital assets are highly entertaining to follow. There are scams, incompetence and villains, just as there are pioneering mathematics, code and great success. This is the money of cyberspace and an attempt to colonise a virtual world. You might get lucky betting against it, but there are easier battles to fight. While Bitcoin may be superseded by another, I would very much doubt you’ll see the end of this brave new world.
Linked From:
http://www.telegraph.co.uk/business/2017/12/01/bitcoin-isnt-bubble-fact-just-getting-started/