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Bitcoin is Not a Bubble, Because… Oh, Really?

Bitcoin is everywhere you look these days. From bank officials, to hedge fund managers, to IT specialists, people with different professions, level of education, interests and investing experience are talking about Bitcoin. And who can blame them – the virtual currency is conquering milestone after milestone, climbing from $8000 to over $11 000 in just ten days. Bitcoin’s phenomenal returns make it very hard for people to resist the urge to join the pack. The fear of missing out on the huge profits is taking over people’s minds. After all, if your neighbor is making easy money and you are not, it makes you feel like a loser. However, most people won’t admit they are buying Bitcoin just because others are buying it too. Instead, people like to sound reasonable, so they come up with plenty of arguments justifying their decision.

Is Bitcoin a bubble? That is the fierce debate these days. Bring two people with opposing opinions together to discuss the subject and the stage is set for a great boxing match. Both sides support their claims with arguments and when they are done talking, each one is even more convinced he/she is right.

bitcoin bubble or not

Those, who have been following our website for at least a year, might be a little confused. First, in August 2016, we published “Bitcoin Hiding an Ace in the Sleeve?”. The price of the cryptocurrency was hovering near $620 back then, but the Elliott Wave Principle suggested we should get ready for a lot more upside. Apparently, we got that right.

Over a year later, in September 2017, with Bitcoin already above $4600, we made a video entitled “Bitcoin Bubble: Is it “Different This Time?”. With BTCUSD above $11 000 today, it looks like we were wrong about that (for now). So the time seems appropriate to pick some of the arguments crypto enthusiasts provide to prove that Bitcoin is not a bubble and see if they could stand the test of critical thinking. We are sure you have heard most of them. Depending on which side you are on, you might have even said some of them yourselves.

Argument #1: Bitcoin is not a bubble, because it will replace money.

Our opinion: Bitcoin cannot be money, because according to countries’ constitutions, the central bank is the only institution, which can issue money as a legal tender. Unless a central bank declares Bitcoin money, no matter how popular it becomes among a country’s citizens, it remains illegal and therefore cannot be widely adopted. It is much more likely that central banks would use the blockchain technology to create unfalsifiable crypto-dollars and crypto-euros, for example.

Argument #2: If the number of people, who use it, continues to rise, central banks will be forced to recognize Bitcoin as a legal tender.

Our opinion: The number of people, who use hard drugs continues to climb, but authorities do not seem eager to legalize heroin, for example.

Argument #3: Bitcoin is not a bubble, because banks are already working on blockchain projects.

Our opinion: Yes, they are. Banks were also working on internet projects in the late 90s, but the dot-com bubble popped anyway. Furthermore, big banks are working to create their own blockchains, superior to Bitcoin’s.

Argument #4: Bitcoin is not a bubble, because the blockchain technology is revolutionary and life-changing.

Our opinion: The internet was a revolutionary invention, as well, but the shares of pets.com, freelotto.com and many others turned out to be completely worthless. The blockchain technology can do without Bitcoin.

Argument #5: Bitcoin is not a bubble, because it is far from the market cap of the dot-com bubble.

Our opinion: Different bubbles reach different market caps. It would have been very easy to short a bubble, if all you needed to do was wait for its total market capitalization to reach the level of the previous one. The market cap of the stock market at the peak of 1929 was different from the market cap of the dot-com bubble, which in turn had a different market cap from the 2007 housing bubble (if a market cap for the housing market can even be calculated).

Argument #6: Bitcoin is not a bubble, because it is not a tulip.

Our opinion: Yeah, while stocks and houses are tulips… Good one.

bitcoin bubble tulip mania

Argument #7: Bitcoin is not a bubble, because its supply is limited and constantly slowing down.

Our opinion: Bitcoin’s supply might be limited, but other cryptocurrencies, many of which with better characteristics than Bitcoin, are already in existence and many more are being created. There are over 800 different cryptocurrencies out there, some of which, such as Ripple, allowing for billions of units to be mined. So much for the limited supply.

Argument #8: Bitcoin is not a bubble, because in order to stop Bitcoin, you need to stop the Internet.

Our answer: Bitcoin does not need to stop existing for its price to fall. It only needs to be overvalued beyond all reason, which it currently appears to be.

Argument #9: Bitcoin is not a bubble, because as long as people continue mining it, it will continue to rise.

Our answer: Bitcoin is not rising, because people mine it. People mine it, because its price is rising.

Argument #10: Bitcoin is not a bubble, because people who say it is, do not understand what it is and how it works.

Our answer: In 1999, Warren Buffett, the world’s greatest investor, held a speech at Sun Valley. In short, he was warning people that the level of the stock market is irrationally high and those, who expect the spectacular returns of the past three years to continue into the future, were up for a big disappointment. Buffett was laughed at. Many of those he spoke in front of were tech entrepreneurs. Some of them had just become billionaires and thought he is simply angry he missed out on the great internet revolution, because his investing principles were old and inapplicable to “the New Era of investing”. They were right, Buffett did not understand the internet back then. Even today he would say he does not fully understand how it works. But he was right technology stocks were in a massive bubble in 1999. They call it the Dot-Com bubble now.

bitcoin bubble warren buffett

Argument #11: Bitcoin is not a bubble, because it is not controlled by an institution.

Our opinion: That is right. Bitcoin is decentralized and no institution can control it. Its price is determined by the people who buy and sell it. And that is exactly what makes Bitcoin the perfect asset for a bubble to form. Allan Greenspan’s policy of low interest rates and deregulation immensely helped the dot-com and the housing bubbles form by providing cheap credit and letting the markets run. When there is nothing to stop it, people’s greed reaches gigantic proportions. Then, all of a sudden, the bubble pops and the illusion of infinite prosperity is shattered.

Argument #12: Bitcoin is not a bubble, because more and more companies accept it as a form of payment.

Our opinion: No, they do not. The price of every product is denominated in a traditional currency, such as the U.S. dollar, not in BTC. If it was possible for a company to be paid in sheep and rice online, they would do it, but only to sell them for dollars as soon as possible. Alas, you cannot wire-transfer animals and seeds. That’s a shame.

Argument #13: Bitcoin is not a bubble, because people won’t give up on easy money and will keep buying.

Our opinion: The same could be said about all the bubbles throughout history. If the price keeps rising, people will keep buying and the uptrend will last forever. But it never does. No trend lasts forever and every person with minimum experience in the financial markets knows that. Chances are good Bitcoin’s would eventually end, as well.

Argument #14: Bitcoin is not a bubble, because people who understand it say its price is going to continue rising.

Our opinion: As the answer to argument #10 demonstrated, it does not matter if someone understands the technology or not. The underlying technology and the asset’s price are two completely different things. Warren Buffett did not have a clue about the internet in 1999, but he correctly recognized a bubble in technology stocks. Tech entrepreneurs knew all about the internet and failed to see the crash coming.

Argument #15: Bitcoin is not a bubble, because NASDAQ and CME are launching futures contracts, based on Bitcoin.

Our opinion: History shows that whatever Wall Street thinks its customers would pay commissions to trade, Wall Street would provide. The fact that the biggest exchanges in the world are going to allow its customers to trade Bitcoin futures does not mean these exchanges believe in the cryptocurrency’s future. It only means they think they could earn big commissions from their clients. And they are probably right about that. After all, a lot of dot-com darlings were listed on the NASDAQ exchange, as well. Most of them vanished into bankruptcy shortly after.

bitcoin bubble cme futures

Argument #16: Bitcoin is not a bubble, because famous people put their reputation on the line promoting it.

Our opinion: Just because someone supports something does not mean he/she is right, no matter how famous. Fame has nothing to do with investing experience, especially if we talk about Paris Hilton and Floyd Mayweather, who already expressed their positive attitude towards Bitcoin and ICOs. In fact, even financial gurus like Allen Greenspan and Jim Cramer did not see the dot-com crash coming. In February 2000, Cramer even said that Internet-related companies “are the only ones worth owning right now.”

Argument #17: Bitcoin is not a bubble, because it is a better store of value than gold.

Our opinion: Better? Is gold a good store of value at all? Right after the Great Recession, just when investors needed a store of value the most, gold crashed by 46% between September 2011 and November 2015 and still has not been able to recover. A store of value is usually something that retains its purchasing power over time. But those, who bought gold as a long-term protection against economic downturns actually lost a lot of money. So how could Bitcoin be a better store of value than gold, if gold is not a store of value at all? The real question is whether Bitcoin is a store of value itself? Currently, it appears so, simply because the price is rising. But if rising prices were the only requirement, then tulips, dot-com stocks and mortgage-backed securities were all good stores of value at one point. Until their prices crashed.

Argument #18: Bitcoin is not a bubble, because people have been calling it a bubble for over a year now and its price continues to climb.

Our opinion: It is nearly impossible to predict how big a bubble can get. Some people recognized the dot-com bubble as early as 1997, but prices kept rising until March 2000. The fact that the price of Bitcoin is rising does not mean it is not a bubble. It only means the Bitcoin bubble is getting bigger.

Argument #19: Bitcoin is not a bubble, because it behaves just like a social media stock. The more people that use it, the more valuable it becomes.

Our opinion: In the long-term, the value of a stock depends on the underlying company’s profits. High profits mean high value. The stock price of Facebook, the world’s largest social media, has been steadily rising, not because more people are using it, which is also true, but because Facebook’s profitability has been increasing every year. In contrast, the number of people, using Twitter and Snapchat, has also been growing, but since both companies are losing hundreds of millions of dollars every year, their stocks have been in a permanent decline ever since they went public. Obviously, being a growing social network does not automatically translate into a higher stock (cryptocurrency) price.

Conclusion

None of the 19 arguments discussed above is strong enough to convince us that Bitcoin is worth the risk. However, only time will tell who is right. That is why the answer to every argument begins with “our opinion”. We do not pretend to possess the absolute truth here. We only tried to provide some food for thought and help those, who are thinking about buying Bitcoin now, see things from a different angle.

Could Bitcoin get even more expensive? Sure. We just do not think Bitcoin is the hen that is going to lay golden eggs until the end of time. If it sounds too good to be true, it probably is. Please, be careful…

Warren Buffet Image Source: Getty Images



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