Bitcoin has been dominating the headlines in the news. You may have seen the following in the media recently:
– “Bitcoin mining ‘is using so much energy that it is causing electricity blackouts’ amid fears it will consume more power than the world by 2020”
– “Experts say Bitcoin mining is consuming more power than used by 159 countries”
– “It is creating a ‘colossal’ carbon footprint as the value of one-coin surges to more than $18,000 amid violent swings in the cryptocurrency market”
The words alone sound like a science fiction novel: Bitcoin … cryptocurrency … electricity blackouts.
What is Bitcoin?
How is it impacting the financial markets today?
And what is its impact on the future market of tomorrow?
Bitcoin is a cryptocurrency, which means it is used in the digital realm as a form of currency online. It has value: it is being traded under futures contracts on the Chicago Board of Trade, and, you can use it as a method of payment in many stores such as the clothing retailer the Gap and the satellite provider DISH Network. It is the quintessential “future is now” online curiosity – a unit of exchange where the transaction does not include a U.S. dollar or some other form of national, physical currency. It’s price-to-dollars has surged in the last year, and it has become more and more prominent with the online market and those sophisticated in the digital sphere.
However, can a currency not sanctioned by state truly compete with the dollar, euro, gold, or more traditional forms of exchange in the marketplace? And is this price surge a market reality, or the classic case of the “bubble” asset.
Coindesk.com Bitcoin Valuation July 2010 to 12/12/2017
Is Bitcoin the Currency of the Future?
- Huge price run-up in 2017 suggests avid interest. From 2010 to 2013, Bitcoin was valued in a range of $100 U.S. dollars. There was a surge in 2013 to a valuation range in $900 U.S. dollars. As of January, the price of one Bitcoin has surged all the way to over $17,000 U.S. dollars. For a currency you cannot hold, or touch, but can only use on a digital screen, this has been a unique surge in value, with global implications.
- It works without a central bank and a printing press – this seems like the ‘future is now’. Bitcoin is the world’s first digital currency, and the one most commonly used as of this date. It works as a “peer-to-peer” transaction. There is no bank to store the money in, no need for a governmental central bank to manage and print the currency. You mine for bitcoins online, you transact business using a bitcoin software program and it is recorded in a non-governmental system of storage known as a blockchain. It can sound technical, but for those familiar with the digital landscape, it is a fairly simple system to use. No central bank makes it a favorite among many who want less of the government involved in economic transactions.
- Futures trading, GDAX trading, and old line Wall Street is all the way in.: Perhaps not all the way in – the NYSE has rejected trading Bitcoin futures because of “wild price discrepancies” making it difficult to create an equitable marketplace. Nonetheless, the Chicago Board of Trade has opened futures contracts on Bitcoin, and it has been firmly established in the global currency exchange.
Bitcoin is a Classic “Bubble” Investment.
- 1800% increase in value … in one year??? You go from a digital currency that can be purchased in $900 U.S. dollars to over $17,000 … and that’s not a bubble? Investors have made money, and you can make money betting on futures, but it is payment mechanism that will be in direct competition with the U.S. dollar as backed by the U.S. government – historically, competing in the Feds space has not been a long-term strategy for success.
- No price transparency. Bitcoin is traded on several exchanges, and the price valuation is widely divergent from one exchange to the other. This was the principal reason the New York Stock Exchange hesitated on allowing futures contracts on Bitcoin from being traded on the market. You cannot get an accurate bid with such price discrepancy. Furthermore, despite its digital nature, the attempts to “mine” for the bitcoin – find it on the internet grid – makes it a not very liquid currency. For these reasons, the price appreciation looks more like speculation and risk than sound investment strategy. Most notably, the price of Bitcoin has seen an 80% correction 5 times in the last 4 years – hardly the model of a stable price climb. For many analysts, all of this makes it a bubble.
- Governments will not accept currency competition they don’t control. Couldn’t governments simply ban digital currency? Yes, and China already has for transactions involving start-up businesses. Many analysts celebrate the attempts at banning, saying that the digital currency would simply move to an open market – and that is the beauty and greatness of free markets and capitalism! But that assumes that more governments, and the biggest one of all – the U.S. – won’t follow suit and attempt to regulate and/or ban competing currencies such as Bitcoin in the future. Because the U.S., and most countries, will not allow any competition to their currency, there will naturally be a limitation built into the system regarding Bitcoin’s market cap and potential growth.
Bitcoin has had a huge run-up in value. But even as we go to press, it is well off it’s highs. It is a tradeable asset in the marketplace: it can be held as a store of wealth, it can be used as a digital payment source, and it can serve as a hedge like gold or government bonds. But the crypto-asset, the crypto-currency, is not a competition to national currencies. Like anything else in the stock market, it can go up, and therefore, it can go down.
“Tulip-mania” – which occurred in the Dutch Republic in the 17th century – was the original “bubble asset” having a huge run-up in value on tulips and then a complete collapse in 1637. It was memorialized in a famous 19th-century book by author Charles Mackay – the title speaks for itself: “Extraordinary Popular Delusions and the Madness of Crowds.”
Whether Bitcoin is a bubble or not, it certainly will go up and down in the market. How can you avoid those potential losses and that roller coaster ride? Call your Ty J. Young Inc. advisor today and learn how you can have your money completely protected from stock market losses and growing at the same time! 877-912-1919.