Bitcoin at $100,000?
Let’s get real
I have read a few times here and there that bitcoin should reach $100,000 “anytime now”. It’s offered with a lot of supporting arguments, when it is not simply posited as inevitable. Well, with 25 years of trading under the belt I beg to differ, and I have been wanting to write on the subject for some time, here are a few ideas to mull over.
Bitcoin is not a financial asset. Come to think of it, shouldn’t it be considered more of a liability? Economic theory is quite clear, and experience leaves little doubt: a corporation creates value or disappears. Holders of financial assets — whether stocks or bonds, base their investment decisions on this reality, this is the only guarantee they have to be reimbursed, let alone make money. The proof of work process behind the bitcoin technology consumes resources, and is unrelated to any economic process. What is the value created that is supposed to give bitcoin its worth above and beyond what is being spent to maintain it?
Bitcoin is not a currency. First of all it is not a “legal tender”, but beyond the legality, it is not rooted in any sort of macroeconomic exchange that would anchor a value, whatever it might be.
Bitcoin is a store of value indeed, but one of speculative value. It is pure speculation, this is what it derives its value from.
Its price is not formed by economic supply and demand, but by price expectations in a self-fulfilling circle: those who believe its price will go up are natural buyers, and conversely. Note that long-time bitcoin holders are natural sellers: those (I am not one of them by the way) who bought it at $0.01 will turn sellers at some point when the price is right. The only chance they have for this to happen is to convince enough buyers to jump in. The reward is enticing — look no further for a strong incentive to cry out loud about those screaming buying opportunities. The reader familiar with financial markets will rightly make the following remark: the above is (also) applicable to the price of a stock. It is driven by the same self-fulfilling process. True, with two major differences: first, the underlying creation of economic value generates a long-standing demand, there no such creation for bitcoin. On the contrary a steady supply is continually created. Second, public markets are regulated, by and large free of any significant manipulation. The information derived from the encounter of supply and demand is therefore much more solid (and as such much less volatile).
I have read in different places that bitcoin will go to the moon because its supply is limited. Well, the supply of decommissioned commercial ships is limited yet I don’t see the price of wrecks being pumped up to the sky. Whatever the supply is, without demand it doesn’t mean much. Where is bitcoin demand coming from? Why would demand grow faster than supply anyway?
Bitcoin has been largely seen as a medium to conduct illegal trading and trafficking. It is very likely that the possibility to transact in the dark creates enough value for bitcoin to be worth something, but let’s think about this a little more. If you’re amassing large amounts of money through illegal activities, you’re probably not very keen to risk losing a significant part of it in price fluctuations. Volatility, which is indeed an unavoidable characteristic of bitcoin (at least today), is not so appealing to dirty money holders. Therefore the possibility to evade money laundering and fiscal obligations seems to be a little short of an explanation for bitcoin’s success so far.
I have also read that bitcoin should be part of any portfolio because of its diversifying effect. Indeed, it is largely uncorrelated to any sort of economic reality (why would it anyway?), but yet is it advisable to hold something subject to pure speculative forces and randomness? Incidentally, this explains why institutional holders are not jumping in. If you are a fund manager, you literally spend most of your time trying to convince investors that you can deliver and sustain superior performance and that luck has nothing to do with it. One may be lucky, but one should not depend on luck. Diversifying into bitcoin means introducing pure luck into your portfolio, or betting that enough buyers will let themselves be convinced to join the crowd. None of which you have control over, and none of which you can confidently explain to your investors.
One possible analogy that comes to mind is that of a lottery ticket. The more people play, the higher the stakes, and the outcome is largely random. Lottery is a hugely profitable business — to the point where it is in many jurisdictions a state monopoly. In that sense bitcoin does have value, and its volatility is highly attractive. What does it mean over the long term ? Not much… As it seems very unlikely to go to $100,000, it seems very unlikely to disappear either.
If bitcoin was only to become a source of liquidity for people to speculate one way or the other, it would still have crafted a place for itself. Creating liquidity is in fact quite a feat in its own right.