"You can’t stop things like Bitcoin. It will be everywhere and the world will have to readjust." —John McAfee, Bitcoin advocate.
"The idea that it [Bitcoin] has some huge intrinsic value is just a joke in my view,"—Warren Buffett
2017 may go down in history as the "Year of the Bitcoin." Having survived the Mt. Gox debacle, the Silk Road scandal, and China's ban on Initial Coin Offerings (ICOs), Bitcoin finally looks like it is here to stay. Bitcoin’s launch on the world’s leading futures exchanges is a ratification of the influence that it currently wields and to its potential future.
Brought to life during the depths of the Great Recession by a bunch of cyberpunks and specifically aimed at addressing the malaise plaguing the financial services world, Bitcoin and the Blockchain technology backing it have clearly come a long way. Describing the increase in valuation from mere cents in 2009 to its current valuation, the word meteoric sounds like an understatement
The irrational exuberance around the rise of Bitcoin (and other crypto currencies) over the past 6 months and in particular the last month which took it to its dizzying heights of more than 2000% since the year start (and the extreme gyrations that ensued) does, however, seem to be misplaced. For an asset which does not yet represent any intrinsic value and takes about $70-$80 (and rising) to mine in energy costs and computing power to reach crazy heights of $18,000 sounds rather unfathomable.
Do we believe that the only way for Bitcoin's to go valuation is up? If we are to believe the history of all the past manias, panics and crashes, it seems that believing "this time it's different" is incredibly naive. We have seen these boom-and-bust cycles repeated over and over again but human memory of these painful events is ephemeral. It seems to be the nature of mankind to inevitably get enamored with a shiny new toy. Bitcoin is precisely the latest shiny new toy.
The valuation of crypto-currencies now exceeds $ 500B and is beyond the valuation of most Fortune 500 companies. As the world stands in awe of the anarchist cypherpunks' invention and their attempt to create a new world order threatening the hegemony of the established fiat currencies issued by sovereign nations, it’s high time to take stock of where this entire Digital Gold revolution is headed.
We need look no further than two recent crises which actually yield valuable secondary effects. During the dot-com boom, many start-up firms whose valuations increased irrationally eventually went under. However, the fundamental e-commerce business model enabled by the underlying internet technologies of the dot-com era has proven to be resilient. Global e-commerce is a mature business model.
In a similar vein, the mortgage backed securities financial crisis of 2008 almost brought the global economy to a grinding halt but the underlying derivatives technology has stood the test of time and derivatives trading volumes stand in the trillions of dollars.
Viewed from this perspective, the Bitcoin meltdown can be expected to be no different. There is definitely froth building up and a crisis brewing. When the bubble will burst is anybody’s guess but I believe it is inevitable. What will remain intact, however is the underlying Blockchain technology and its ever increasing list of myriad applications across a diverse set of use cases. What should also remain intact is the revolutionary streak to rid the world of the more than .5 trillion dollars in financial intermediation charges and the inefficiencies that have accompanied that. The drive towards creating decentralized trust without an intervening central authority should continue and help create far more efficient markets.
In conclusion: Are we headed for yet another crisis fueled by Bitcoin?’ Eighty percent of respondents of a recent CNBC Fed Survey believe that the current valuation of Bitcoin is a bubble and I would surmise the same.
If there's a silver lining in this scenario it is that the impact will be felt not by the global economy but rather by the speculators enamored with their shiny new toy. Crypto-currency daily trading volumes are still in single digit billion dollars which is a drop in the ocean compared to other asset classes (forex, stocks, commodities etc.). The overall valuation of crypto-currencies—approximately half a trillion dollars—is a fraction of the worldwide gold reserves (exceeding $7 trillion) and the overall amount of money tied up in Bitcoin is limited to billions (as compared to the trillions during the dot-com boom and bust and the Great Recession).
Sure, there will be winners and losers but the global economy should move on without any significant derailment. On the flip side, this may also provide the right correction opportunity for a shakeout in the hundreds of existing crypto-currencies and help bring about a much needed consolidation. This phase may also provide the much needed price discovery to take place to determine the long-term intrinsic value of Bitcoin and others.
My advice: hold your breath (and money) while the Bitcoin frenzy goes through the motions of settling on its true market value. Keep your eye on the secondary effects of the crypto-currency craze. That's where the real value is.
It seems to be the nature of mankind to inevitably get enamored with a shiny new toy. Bitcoin is precisely the latest shiny new toy.