Everyone is talking about Bitcoin. Many investors, even those who never bought any, are now claiming to be early adopters. The world loves a winner and Bitcoin has outperformed just about every other asset class on the planet. If you bought $1,000 of Bitcoin in July 2010 at the opening price of 6 cents ($0.06) and held your 16,667 Bitcoin until July 3, 2017 when it traded at $2,605.17 you would have $44.0 million of value. The same people who now are claiming Bitcoin victory probably also bought Amazon, Google, Apple and Netflix at the initial offering.
Actually, if you own 16,667 Bitcoin you know not to talk about it because that makes you and your family prime kidnap targets. Those people who boast about early investment aren’t real Bitcoin investors. The real investors are the ones with the Cheshire cat smile and a fuzzy recollection of its antecedents: “ I’m not crazy, my reality is just different than yours.”
The real Bitcoin investors have withstood a roller coaster ride and the chart below does not really demonstrate the 18% two-day decline in June:
Source: Coindesk price of Bitcoin from inception
Bitcoin Has Survived Big Challenges
The biggest exchange and a trusted custodian of a large percentage of the early Bitcoin in circulation, Mt. Gox in Japan, was hacked in 2014 and $350-$400 million Bitcoin was stolen. The digital currency rebounded. New York State decided to regulate Bitcoin dealers who did business in the State of New York by creating a licensing process for companies like Coinbase. The guy who led the charge for New York, Benjamin Lawsky, got the legislation he wanted which put Bitcoin squarely within the regulatory purview of the New York Department of Financial Services. Like any good capitalist, Mr. Lawsky then resigned and went into the business of consulting with Bitcoin dealers who had to interpret and comply with the regulations he had just written. The currency rebounded again.
Bitcoin entered adulthood in 2015 and 2016 when it effectively provided wealthy Chinese with an escape route out of the currency restrictions imposed by the Chinese government to halt the flight of capital out of China. Given the easy conversion of Bitcoin to US Dollars and the more stable trading market, the only risk was getting caught trying to convert Chinese assets into Bitcoin.
A Schism Among The Users And Developers
Now that everyone wants Bitcoin I am wondering whether the business model is showing strains. First the price that a Bitcoin miner charges to validate a single transfer has increased from several cents to as much as six dollars. Bitcoin was supposed to lower the cost of friction but the computing power needed to validate the block chain ledger has exploded as the digital currency gains acceptance.
You also need patience to transact in Bitcoin. The average transaction now takes significantly more time than the early days(as long as 20 minutes) to be verified and confirmed.
Finally, the user group that interprets the rules for the Bitcoin business model has many fundamental disagreements principal of which is whether Bitcoin should have a fixed supply of 21 million Bitcoin or an expanded supply and trading characteristics like foreign currencies. The purists want a store of value, like gold, and an anonymous way to subvert fiat currencies. The expansionists are bothered by speed and transaction costs and often comprise larger groups proposing changes to shift the economic model in their favor.
On top of that Ethereum has emerged as a viable competitor to Bitcoin. Its chart looks like Corbett’s Couloir in Jackson Hole:
Source: World Coin Index Price Of Ethereum
As “The Wall Street Journal” points out in its July 3, 2017 edition, Bitcoin can no longer be used to buy a cup of coffee because the transaction price is $6x the cost. This is bad news for holders of Bitcoin because it relegates the digital currency to a doomsday asset class like gold. Given the state of the world, doomsday asset classes will remain popular with people who want some insurance against the manipulation of mainstream currencies by politicians. Whether it is Brexit, the US border tax, the Chinese currency restrictions or Argentina’s once-a-decade devaluation of its currency, Bitcoin will have a place but, for now, maybe not the one Satoshi Nakamoto, its anonymous founder, envisioned. But would you buy Ethereum?