I feel a big part of Bitcoin's success derives from more of a political standpoint rather than a viable investment option. With garnered support from celebrity leftists, on top of mainstream libertarians, the media has turned investing in Bitcoins and other crypto currencies, into a kind of “Don’t Tread on Me” political statement. With all the tribulations the global economy is facing today, thanks to central banks, it’s no wonder why so many people are eating up the political hype surrounding the Bitcoin and how it represents a revolutionary movement. Movements can bring great changes, but they can also flop, and as an investor, I have to ask myself, is Bitcoin an investment trend that is here to stay and revolutionize the marketplace, or is it just a maturing fad fueled by the ongoing hype that promotes it?
The Value in Bitcoin
The thing about Bitcoin is that it is really not much different than investing in a company on the stock market. Stocks have a finite amount of shares for distribution (authorized shares), but there are also derivatives that supply the market’s demand, and acts as a hedge for shareholders. There will ultimately be a finite amount of Bitcoins (21 Million), and just like the stock exchange, I can see fractional reserve banking methods taking shape in the future to meet supply and demand. Ultimately a handful of corporations/banks will end up controlling the majority share of Bitcoin (similar to what happened with Gold), and people will end up trading derivatives of Bitcoin. This could cause the value of Bitcoins to skyrocket like gold, but unlike tangible commodities like gold and other precious metals, coffee, corn, sugar, oil, etc., Bitcoin has no intrinsic value.
Bitcoin also isn’t backed by anything with intrinsic value either, which makes me feel like Bitcoin is more of a virtual commodity or faux commodity than it is a new form of currency. Personally I see Bitcoin as an investment option that is maybe a rung or two above trading cards and other collectibles, but then again you are able to hold your trading cards and collectibles in hand. If more people were familiar with how the stock market works, they would be able to see that Bitcoin’s value is sustained by the volume within the exchange. The large amount of volume is created by ongoing press releases and fandom by those who believe in the Bitcoin ideology. There is no business creating products/services behind the bitcoins, like there is with shares in the stock market (not all stocks). So take away the consistent press releases that drive Bitcoin hype and the volume will subside. What you are left with is an unregistered, self-regulating (no connection with the SEC rules, just digital algorithms), uninsured, and highly volatile investment “security” that has no intrinsic value or backed by anything of intrinsic value, that only exists in virtual reality. The hardcore fans would end up being the only participants in this computer simulated form of coin collecting.
The Test of Time
Some economists say Bitcoin is susceptible to deflation. I believe it is inevitable, because it is literally a religion currency. It will only retain value so long as people continue to have faith in it. It is a borderline Ponzi scheme, because it will need to continue to attract new money into the system in order for the value to continue to grow. The fact that there is a finite amount of authorized Bitcoins that will be created (a very small amount at that), this means the value of Bitcoins can easily spike. We have seen this happen at least a few times now where it has hit over a thousand USD by Mar2014. Since there is such a relatively small supply of authorized Bitcoins, there will be more of an incentive to save them than to spend them , creating a why spend today if it’s going to have more value tomorrow paradox. My speculation is that there will eventually be a handful of majority shareholders, and those who are still interested in the virtual commodity by that time will be trading a diluted form of the currency and/or derivatives. I believe the dilution is what will ultimately kill the faith in the currency, and deflation will be the end result. This happens all the time to micro-cap stocks, whose hype has subsided.
So Are You Saying Screw Bitcoin?
Bitcoin is the investment choice of the SHTF demographic, so this means we may see more spikes like we did at the end of 2013:
· Whenever there is impending “doom and gloom” in world news
· Around the end of each fiscal year
· During Election time
· Emergence of new Federal laws/policies that restrict/modify our current rights, or contradicts the constitution
· When there is news of war
· If there is negative news on Wall Street
These are just a handful of catalysts that I believe drive Bitcoin’s price volatility. So what’s the bottom line with Bitcoin? At the risk of sounding like a complete cop out on the subject, mostly because I am just providing my analysis & not financial advice, I will leave you with this statement:
The thing about Bitcoin is that it is really not much different than investing in a company on the stock market. Stocks have a finite amount of shares for distribution (authorized shares), but there are also derivatives that supply the market’s demand, and acts as a hedge for shareholders. There will ultimately be a finite amount of Bitcoins (21 Million), and just like the stock exchange, I can see fractional reserve banking methods taking shape in the future to meet supply and demand. Ultimately a handful of corporations/banks will end up controlling the majority share of Bitcoin (similar to what happened with Gold), and people will end up trading derivatives of Bitcoin. This could cause the value of Bitcoins to skyrocket like gold, but unlike tangible commodities like gold and other precious metals, coffee, corn, sugar, oil, etc., Bitcoin has no intrinsic value.
Bitcoin also isn’t backed by anything with intrinsic value either, which makes me feel like Bitcoin is more of a virtual commodity or faux commodity than it is a new form of currency. Personally I see Bitcoin as an investment option that is maybe a rung or two above trading cards and other collectibles, but then again you are able to hold your trading cards and collectibles in hand. If more people were familiar with how the stock market works, they would be able to see that Bitcoin’s value is sustained by the volume within the exchange. The large amount of volume is created by ongoing press releases and fandom by those who believe in the Bitcoin ideology. There is no business creating products/services behind the bitcoins, like there is with shares in the stock market (not all stocks). So take away the consistent press releases that drive Bitcoin hype and the volume will subside. What you are left with is an unregistered, self-regulating (no connection with the SEC rules, just digital algorithms), uninsured, and highly volatile investment “security” that has no intrinsic value or backed by anything of intrinsic value, that only exists in virtual reality. The hardcore fans would end up being the only participants in this computer simulated form of coin collecting.
The Test of Time
Some economists say Bitcoin is susceptible to deflation. I believe it is inevitable, because it is literally a religion currency. It will only retain value so long as people continue to have faith in it. It is a borderline Ponzi scheme, because it will need to continue to attract new money into the system in order for the value to continue to grow. The fact that there is a finite amount of authorized Bitcoins that will be created (a very small amount at that), this means the value of Bitcoins can easily spike. We have seen this happen at least a few times now where it has hit over a thousand USD by Mar2014. Since there is such a relatively small supply of authorized Bitcoins, there will be more of an incentive to save them than to spend them , creating a why spend today if it’s going to have more value tomorrow paradox. My speculation is that there will eventually be a handful of majority shareholders, and those who are still interested in the virtual commodity by that time will be trading a diluted form of the currency and/or derivatives. I believe the dilution is what will ultimately kill the faith in the currency, and deflation will be the end result. This happens all the time to micro-cap stocks, whose hype has subsided.
So Are You Saying Screw Bitcoin?
Bitcoin is the investment choice of the SHTF demographic, so this means we may see more spikes like we did at the end of 2013:
· Whenever there is impending “doom and gloom” in world news
· Around the end of each fiscal year
· During Election time
· Emergence of new Federal laws/policies that restrict/modify our current rights, or contradicts the constitution
· When there is news of war
· If there is negative news on Wall Street
These are just a handful of catalysts that I believe drive Bitcoin’s price volatility. So what’s the bottom line with Bitcoin? At the risk of sounding like a complete cop out on the subject, mostly because I am just providing my analysis & not financial advice, I will leave you with this statement:
Those who really know what they are doing in Bitcoin will hold money, and those who don’t know what they are doing in Bitcoin will virtually hold nothing.
