Crypto-mania has peaked.
The hype surrounding cryptocurrencies reached a fever pitch in mid-December when Bitcoin prices flew to nearly $20,000. Prices were up over 1,900% in 12 months.
December 2017 also saw a record in both the number of initial coin offerings (ICOs) and the amount of money raised by new ICOs. There were a total of 74 new ICOs in December, which raised over $1.6 billion in funds. The number of new ICOs dropped in January and continues to fall as we get deeper into February.
The crypto market is already overcrowded. Along with Bitcoin, there are now over 1,500 cryptocurrencies on the market.
There are currently more cryptocurrencies than the total number of issuers listed on Canada’s Toronto Stock Exchange.
The record-breaking month for ICOs and Bitcoin’s record price also coincided with a new trend in investor-bait for public companies: include cryptocurrency or blockchain in your business model however possible.
The most notable of the initial campaigns was the Long Island Iced Tea Corp. In late December, the iced tea maker suddenly announced the company would entirely shift its focus toward Bitcoin and blockchain technology — and even change the company’s name to Long Blockchain Corp. (NASDAQ: LBCC).
The announcement caused share prices of the tiny beverage company to skyrocket over 250% in a single day.
With Bitcoin and cryptocurrency prices flying, there was almost no limit to the optimism among social media posters. Some believed the price of Bitcoin was going to a million. Others believed it was going to infinity.
December 2017 was no doubt the peak of crypto-mania. Since then, Bitcoin prices have fallen as much as 70%, dipping below $6,000 earlier this week. Prices have since recovered a bit. At last look, BTC was trading just over $8,000. But with Bitcoin prices in sharp decline since December, the hype surrounding the cryptocurrency is now quieting down.
Bitcoin’s original luster and brilliance is fading. It’s starting to lose that new car smell.
I think that makes it a good time to take stock of what we’ve learned about Bitcoin over the past several months to reevaluate the cryptocurrency’s true value.
What Is Bitcoin’s Real Value?
Bitcoin’s narrative began with it being an instrument for instant, easy, and anonymous transferring of funds. It was, for all intents and purposes, to be a currency.
But as it stands today, Bitcoin is way too volatile to be used as a currency by the masses… it’s failing at the job of being money.
Volatility is the last thing you want in your currency. Among other reasons, that’s because the settlement of transactions takes time.
There’s really no such thing as an instant transaction. Even digital transactions take time, albeit a very short amount of time.
But only a very short amount of time is needed to interfere with payment values when there are rapid price fluctuations in the currency being used.
Currency volatility can be a major problem for both retailers and customers. And even though there are many online retailers that now accept Bitcoin, some are now ending its payment support because of the crypto’s price volatility.
In 2014, Stripe became one of the first major payment processors to support Bitcoin payments. But the company recently announced it will end support for Bitcoin as a payment method in April:
Transaction confirmation times have risen substantially; this, in turn, has led to an increase in the failure rate of transactions denominated in fiat currencies. By the time the transaction is confirmed, fluctuations in Bitcoin price mean that it’s for the “wrong” amount.
At the end of the day, Bitcoin’s volatility makes it a poor form of money to be used on a large scale by retailers and consumers. Bitcoin’s volatility may change in the future. But for now, Bitcoin is too unstable to be sound money.
So if Bitcoin isn’t valuable as money, why is it valuable at all?
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Well, there are many opinions about the nature of Bitcoin’s value. Some will say Bitcoin’s value is in its underlying technology. Others will say Bitcoin’s simply not valuable at all. But as a long-time student of the gold market, I have an alternative perspective on Bitcoin’s value.
While I do believe Bitcoin’s underlying technology is nothing less than revolutionary, I believe Bitcoin is valuable for the same reason gold is.
Bitcoin has always been compared to gold. Many have even called Bitcoin “the new gold.” And, in many ways, Bitcoin and gold do have a lot in common.
Gold and Bitcoin both have finite supplies. And they’re both monetary and wealth storage assets independent of government.
Neither Bitcoin nor gold produce any income, either. You can’t eat, grow food on, gather water from, live on top of, or otherwise physically use Bitcoin or gold, other than for exchange. Gold has some limited utility in the industrial sector. But aside from limited utility, both are mostly useless to the masses.
Other than sell it for cash, what would you actually do with a million ounces of gold? Look at it in a bank safe?
What would you actually do with a million Bitcoin? You couldn’t even physically look at it.
Warren Buffett famously said of gold:
Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.
The same can be said of Bitcoin: Bitcoin gets electronically mined in China, or someplace. Then we digitally store it on a server and pay exchanges and miners to guard it. It has no utility. Anyone watching from Mars would be scratching their head.
So why does either have any price value at all?
Well, again, there are many opinions on why gold has any value. But from my perspective, it’s all about faith. Here’s what I mean…
Fervent gold bugs will argue until they’re blue in the face that gold has a natural “intrinsic value.” But the value of gold is ultimately driven by the mistrust of government and/or fear the controlling powers are at significant risk in some way.
When people mistrust the government or believe it’s at risk, their faith in the establishment naturally shifts to independent systems.
Gold is an independent monetary and wealth storage system. The government doesn’t control the supply or value of gold. So, when people mistrust the government, they seek out independence in gold. This is what ultimately drives gold’s value today.
Bitcoin is also an independent monetary and wealth storage system. There is no government controlling the supply or value of Bitcoin. And if you ask them, many of the crypto-obsessed would tell you Bitcoin’s independence from government is one of its defining and most valuable characteristics.
Going forward, I expect the price of Bitcoin to be driven by the same factors that drive gold prices: In times when people mistrust their government and/or fear the controlling powers are at risk in some way, the price of Bitcoin will be driven higher.
In a way, Bitcoin is very much a new gold.
It’s not the new gold…
It’s a new gold.
Bitcoin isn’t set to replace gold. Gold has a +5,000-year history as a strategic monetary asset and is still very much used as such.
But I do believe Bitcoin will likely end up next to gold as an anti-establishment asset. The next Brexit, major currency collapse, or other large-scale geopolitical breakdown will very likely bring significant price increases to Bitcoin… and gold.
To sum it up, Bitcoin is valuable for the same reason gold is valuable. It’s an anti-establishment/pro-independent asset. And going forward, as any anti-establishment sentiment grows, I expect the price of Bitcoin (and gold) to follow.
Until next time,
Luke Burgess
As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bull and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.
