Bitcoin's price vs. Economics 101

November 30, 2017

 

Wow! Is the Bitcoin craze getting a little out of hand, or what? Striking $10,000, people are now speculating it will hit over $40,000 in the next six months. I felt it necessary in all the hype to lay forth a few realities of what is happening with Bitcoin, based on economic principles that you learn on day-one in any high school econ class - Supply vs. Demand.

 

 

What many people entrenched in fintech and specifically the crypto-asset space are aware of, is that most of the Bitcoin mined and in existence today is not traded. People have just be holding onto it. The reason for this can be viewed as smart investing, hoarding, and everything in between. The simple fact is though, as the price continues to rise exponentially, people will continue to hold as opposed to trading, which further perpetuates the supply and demand imbalance.

 

 So the principle is simple. A limited supply of Bitcoin, paired with an overwhelming demand (a.k.a. hype) translates into an exaggerated price hike for Bitcoin. What real reason is there for a sudden spike in Bitcoin? Is there any news that actually would justify meteoric rises in price? It isn't like Bitcoin has quarterly performance results. Even after the looming hard fork fizzled away, the price has continued to climb. You could say that it is pure optimism propelling the price. Even people wanting to feel good about Christmas would be enough to promote a jump in share price for value appreciation that isn't based on something solid.

 

So time for a small prediction. Yes it's obvious, but that's why it's economics 101, and why I don't understand why people talk about Bitcoin like it's a new religion. As the price of Bitcoin races past multiple milestones, there will always be people who have had their fill, maybe don't believe in Bitcoin beyond an opportunistic investment vehicle, or feel they have tested their nerves to their limits, and will sell! If enough people start to feel the same way, compounded by automated sell orders kicking in, you see a simple reversal in the economics. The supply side expands, outpacing demand, and the price will crash. What people so often fail to see in an inflating bubble is the tipping point after which it goes pop. There will be a correction, the question is how deep will it be. Perhaps if governments wake up tomorrow and say Bitcoin is regulated, it will see a massive lift in sentiment and value, but there will still be a correction to follow; it will have only been a delay of the inevitable. 

 

 

I am not at all critical of the value of distributed ledger technology (DLT), but Bitcoin has never made sense to me, so I have never invested. Ether, on the other hand, I get. As a smart contract platform, it has an evolutionary application to every industry in the world, and it will change the world as we know it. I do not see the same with Bitcoin. The support that Ether has for adoption through platforms like the Enterprise Ethereum Alliance are substantial, and sit well with my value-investing principles. Bitcoin has yet to prove to me to be more than simply the first of many. What will its value to the mainstream public be when countries start to issue their own crypto-currencies? And to be clear, government-backed crypto is an actual currency, unlike Bitcoin and the other blockchain tokens of today which are in-fact a misstated asset class. I wonder what a pensioner, or the poor (people in the crypto space actually believe it will be the cure for the unbanked, but that's a blog for another day) or really anyone who couldn't afford to see savings turn to dust do? In the face of choosing between something regulated and backed by a government, and something self-regulated by an anonymous community.

 

 

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