Bitcoin, and by default, the Bitcoin Investment Trust (OTCQX:GBTC), is becoming a binary - and rather volatile - investment. Granted, cryptocurrency isn’t known for its stability, bitcoin will be borderline bipolar over the next couple of weeks as the cryptocurrency goes through an internal battle that may lead to a split into two currencies.
Many point to the silver lining for bitcoin. Bitcoin’s market cap is roughly $40 billion, just a fraction of gold’s $7.5 trillion market value. The supply of bitcoin will also grow slower than that of gold over the next half decade. Bitcoin’s ability to prove itself as a better store of value than gold could be the next legup for bitcoin and cryptocurrencies in general.
There will be near-term volatility and uncertainty with bitcoin; however, longer term the idea that made bitcoin so exciting could still be intact. Fundstrat believes that bitcoin could hit $20,000 by 2022. Part of what fuels that extreme price target is the idea that bitcoin could get a major boost from central banks moving from owning gold to owning cryptocurrencies.
The problem, however, is getting cryptocurrencies to a solid level - that is, the market value will need to move up about five times from the current $100 billion before central banks show interest. But such a move would help cryptocurrencies become ‘legitimate’ and truly compete with gold. Sure, bitcoin is volatile. Bitcoin’s annualized volatility is roughly 75%. But volatility isn’t anything new for currency investors, even for gold investors. During the 1970s, gold’s volatility was 90%.
But... the near-term issues are big: There is a bitcoin civil war.
Bitcoin is scheduled to get two competing software updates at the end of the month, which could split the currency in two. This internal battle is all over how to increase processing time and capability of the blockchain. On one side of the fence is the miners who want to increase the block size limit on the blockchain. Then there’s the developers that want some of the data managed outside the main network to help with congestion.
What that means for holders and miners, no one really knows. But it is in everyone’s best interest to come to an agreement and settle without a split. A new version of software that doubles the block chain size in the near term, until a longer-term solution is found, will be released on July 21. By all accounts, this could be an amicable solution. For 10 days after the software release, it’ll be monitored to see if 80% of miners adopt it, but anything less will create a gross uncertainty on the August 1 deadline for a decision.
If things go ‘bad’, it should be quick and volatile. I don’t own any bitcoin, but will likely hold out until being able to get in between $1,600-$1,800 - pre-split that is.
But the likelihood of a settlement has been increased in recent months given the pressure from ethereum, which is gaining traction and market share on bitcoin. Or, some might consider this the ‘right’ time for the currency to fork/split and explore their own solutions - likely at the expense of a price crash. That, would also be a positive for ethereum. Either way, all this bitcoin uncertainty creates a win-win situation for ethereum.
Bitcoin is still also facing practical application overhang - one of the big issues for bitcoin is that it’s still too expensive to use bitcoin for small things like coffee. The transaction fee for bitcoin is up to $5, the highest ever. A lot of the use cases for bitcoin as a transactional currency are dead before beginning. Meanwhile, ethereum isn't interested in transactions and is focused on more productive things like smart contracts.
All in all, all of this still points to interim pressure for the GBTC and bitcoin - although the case for GBTC is a mess 'as is.' But if central banks and governments show an appetite for cryptocurrencies, bitcoin can win, so can ethereum. It’s the number two currency behind bitcoin and quickly gaining ground. If bitcoin can sort out its internal conflict, ethereum could overtake bitcoin in terms of market cap before 2018.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am/we are long Ethereum.