Bitcoin: Not A Store Of Value But A Creator Of It Instead, And Why Does It Have To Be In A Bubble?
It’s been a difficult several weeks for Bitcoin (COIN). The coveted digital asset has fallen by nearly 50% in the last 5 weeks, erasing roughly $140 billion of its market value in the process. Many people may consider such staggering losses as the beginning of the end for Bitcoin, a Bitcoin bear market, the final prick in the “Bitcoin Bubble.” However, the truth is that we are likely still very far from the real Bitcoin bubble, and what we are witnessing now is a healthy correction process that is about to present Bitcoin believers with a tremendous buying opportunity.
Bitcoin 1-Year Chart
Bitcoin: Not Your Father’s Berkshire Hathaway Stock
Berkshire Hathaway (BRK-A) is often looked up at as one of the most successful companies in corporate American history. In fact, if we take its estimated “IPO” price in 1964 of roughly $19, we can see that Berkshire’s share price grew by an astounding 1,705,000% to a current price of about $324,000. If we compare that to Microsoft’s (MSFT) split adjusted IPO price of roughly $0.09 in 1986, the stock has gained about 102,000%, as its stock has climbed to $92 through the years.
Impressively, if you’d invested $1,000 in MSFT in 1986 you would have over a million dollars today. Even more impressively, if you had invested $1,000 in Berkshire in 1964 you would have a whopping $17 million today. However, if you had gotten into Bitcoin when Laszlo Hanyecz made his now infamous two pizza purchase using 10,000 BTCs your $1000 investment would have shot up by 500,000,000% and would be worth a mind blowing $5 billion today. To be fair Bitcoin was not officially trading then, but even if you had invested $1,000 in Bitcoin when it officially started trading in 2010 at $0.06 your investment would be worth a staggering $200 million today.
The reason I illustrated this is to show that Bitcoin is a very unusual asset. We’ve never seen a stock, or any other trading instrument appreciate by 500 million %, or even by 20 million %, more so in fewer than just 10 years. But Bitcoin has, therefore it’s different, thus we can expect it to behave differently, and this does not necessarily mean that it’s in a bubble.
Bitcoin: An Unprecedented Phenomenon
Bitcoin is often compared to companies. Commentators have said “today, Bitcoin’s value surpassed Boing’s market cap, or Disney’s market cap, or someone else’s market cap.” However, Bitcoin is not a company, it is a developing global payment and store of value system. Bitcoin is both a product and a service and has the potential to become a prominent part of the world’s financial system going forward. Bitcoin’s duel functionality potential provides enormous opportunities and massive growth potential going forward.
So, how much is Bitcoin’s product, and service functionality potential ultimately worth, is it worth as much as Boeing, and Disney put together? How about if we ad Apple to the valuation? I am not sure how many company’s valuations Bitcoin will ultimately be worth, but I know the functional alternative it offers to the current monetary system and the massive market share it can ultimately compete for is worth a lot, perhaps trillions, not billions.
Bitcoin already has a firm grasp as the predominant reserve cryptocurrency of the world. However, Bitcoin also has the potential to become the overall reserve global currency. Moreover, Bitcoin is already the world’s go to digital store of value, or creator of value, but it has the potential to become a far more prominent player in this market as well. Bitcoin could effectively compete with gold and major fiat currencies for a significant portion of the $40 trillion global store of value, and the world wide medium of exchange markets.
Why Bitcoin is Better
Bitcoin is unique, it’s the first truly global, and decentralized monetary phenomenon. Therefore, it cannot be overprinted, inflated, duplicated, manipulated, or counterfeited. All traditional currencies that control the medium of exchange and store of value markets can.
In times of crises, fiat currencies can, and many have melted away to near zero due to hyperinflation and other government, and central bank induced catastrophes. Bitcoin is decentralized and is not controlled by a centralized system, therefore is mostly immune to government and central bank provoked misfortunes.
King Dollar is Crashing
The dollar is essentially rolling over. The US Dollar Index is down by well over 10% in the last year while Bitcoin is up by roughly 1,000%. Moreover, the dollar has punched through major support and appears weaker than it has in a very long time. The dollar’s steep decline in conjunction with the recent selloff in bonds is quite troubling and could be signaling the beginning of something worse to come going forward. Once again, this is a byproduct of government intervention, overprinting, overspending, over-inflating, and manipulating. If bonds and the dollar continue to sell off some type of loss of confidence may be inescapable, which should drive more people towards Bitcoin.
USD 1-Year Chart
Bitcoin Can Improve Over Time
Ultimately, Bitcoin is going to be much faster to transact with, and it is going to be far cheaper to use than utilizing the current banking system. There is no need to pay for costly exchange rates when sending Bitcoin cross borders. Also, you can easily conduct a relatively large multimillion dollar transaction using Bitcoin. With the traditional banking system, not so much. Most people have to jump through quite a few hoops and pay a good deal of money to make a sizable transaction happen going through a conventional bank.
If You Treat Them Right No One Can Take Your Bitcoins
Bitcoin cannot be confiscated. Your Bitcoins are safe if you don’t give out your private key and keep your coins in a hardware wallet. That FED printed paper people call real money can be easily confiscated or frozen in your bank account for whatever reason. Moreover, there have been instances throughout history when gold has been confiscated as well, most notably by the U.S. government in the 1930s.
Bitcoin has many advantages and it can’t be confiscated or nationalized by the government due to its decentralized nature. Therefore, given its functional capabilities, Bitcoin should become the go to global medium of exchange and worldwide store of value product of choice in the future.
But Why Bitcoin and Not Altcoins?
Bitcoin is the gold standard of digital assets, and it has the crucial first mover advantage. Bitcoin also has the most significant, multibillion dollar infrastructure, capable to withstand the test of time. In addition, most coins are created to compliment Bitcoin, not compete directly with it, especially not in the store of value space. Moreover, those coins that are created for transactional purposes are not nearly as well known or as adopted as Bitcoin. BTC is the face of digital global commerce and with the introduction of the Lightning Network should remain the preferred choice for merchants and consumers alike.
But How Can Bitcoin Succeed as a Medium of Exchange, isn’t it Slow and Expensive?
Bitcoin’s blockchain can currently only process roughly 10 transactions per second, which is slow in the global scheme of things. Transaction costs have also shot up recently due to BTC’s rising price and elevated costs for mining. However, the introduction of the Lightning Network promises to solve all that.
The Lightning Network is a protocol that creates an off-chain system by forming a network of payment channels that can be accessed by involved parties independent of the broader blockchain network. This is essentially an add-on to Bitcoin’s blockchain that solves scalability and cost issues by taking transactions off the main network and onto a more private network amongst the users of the underlying payment channel.
The Lightning Network can process thousands of transactions per second. Moreover, transactions are conducted at a fraction of the current cost, which makes the upgraded Bitcoin payment system much cheaper than the current mass payment processing system, and capable of conducing millions of transactions per day much like Visa (V) and MasterCard (MA). The Lightning Network is scheduled to be launched sometime in mid-2018.
The successful introduction of this network should be a major breakthrough in the Bitcoin scalability process and should impact Bitcoin’s price very favorably.
How Can Bitcoin be Considered a Store of Value, It’s So Volatile?
Bitcoin is very volatile now, but that doesn’t mean it is going to be volatile forever. In fact, I think it’s incorrect to call Bitcoin a store of value right now. Bitcoin should be referred to as a creator of value instead. As we discussed earlier Bitcoin has appreciated by roughly 500,000,000% since it was first implemented as a medium of exchange fewer than 10 years ago. If that’s not a creator of value then I don’t know what is. Once Bitcoin reaches its full potential its price should stabilize, and BTC will become much less volatile, possibly trading in a similar manner to gold down the line.
Why Bitcoin and Not Gold?
Gold is great, its shiny, it looks and feels good in your hands, you can make nice trinkets out of it. However, it is extremely impractical to use for anything else, especially a form of currency. In the old days, it was fine, because people walked around with little sachets of gold coins, and they gave the gold coins to each other for goods and services. But that was then, and this is now. We live in a global world, in which transactions have to be made in a matter of milliseconds with interconnected parties across the entire globe. Therefore, gold is not really an option in this respect.
Gold works as a somewhat effective store of value, but that is about it, it has outlived its usefulness as a medium of exchange. You cannot use gold easily, after all, how would you make a multimillion dollar payment using gold? The security costs alone would add up to enormous amounts, and then there is storing it. Also, as we’ve seen it before, gold can be confiscated in times of “national emergency”. Bitcoin doesn’t have any of these issues and everything that gold can do Bitcoin can essentially do even better. Therefore, it appears gold has become somewhat of a novelty. Yes, it’s neat, you can make nice jewelry out of it, but that is about it, gold has lost most of its real-world functionality purposes, Bitcoin on the other hand is just getting started.
Technical View: What We Can Expect Going Forward
Although I cannot say for certain that the Bitcoin selling is over, I do believe that a great long term buying opportunity lies ahead. The Charts still look bearish short-term, but that says nothing to Bitcoin’s ultimate success and price. Currently, the $9,500-$10,000 level is crucial short-term support. Any decisive price action below this level would likely mean a decline all the way down to $5,000 - $6,000 level, my target range for the current correction. This would naturally present an extremely attractive buying opportunity in my view.
Bitcoin 3-Month Chart
It also possible that Bitcoin may bottom around the $10,000 level, in which case resistance is now the $12,500-$13,000 level. Bitcoin needs to trade decisively above this range in order to regain momentum and proceed higher.
Bitcoin 10-Day Chart
Unfortunately, judging by prior chart patterns it appears we still may go lower before ultimately heading higher again. This can be looked at as a positive element though, as lower prices will offer much better buying opportunities and will create significant buyer demand, setting up the launch pad for the next move higher.
The Bottom Line: Who Said Bitcoin Had to be in a Bubble?
Like I mentioned earlier, Bitcoin is an unprecedented phenomenon, therefore it is different, and we can expect it to behave unconventionally. Thus, 30, 40, or 50% corrections are not the end of Bitcoin, and are not indicative of a prolonged bear market in Bitcoin either. Instead, this is how Bitcoin behaves, which is somewhat logical after a 2,500% run up in one year. In fact, even if Bitcoin drops 75% from its high of $20,000 down to $5,000, it will still be up by 460% over the last year. Also, the next leg up should propel BTC significantly higher, to roughly $100,000, and it still would not necessarily be a bubble.
In order for Bitcoin to even be considered a bubble the participation rate would have to be much higher. Since BTC is a global phenomenon a participation rate of significantly higher than the current 0.5% is expected for BTC to be in a “bubble”. Also, Bitcoin would likely be much further along in its mining process. Currently fewer than 17 million Bitcoins have been mined. Peak price, is likely to coincide with peak Bitcoin as demand should intensify with the mining of the last Bitcoins. However, this will not occur until sometime in the 2030s. So, Bitcoin’s price is not likely anywhere near its top. Also, if the real Bitcoin bubble does arrive, it will likely be at a time far fewer people are calling it a “Bitcoin Bubble”. Finally, here is a revolutionary thought not often discussed. Who said that Bitcoin and the bubble phenomenon have to go together? Has anyone considered that there isn’t and there may never be a “Bitcoin Bubble”, after all, Bitcoin is an unprecedented phenomenon the likes of which no one has ever seen before.
Disclaimer: This article expresses solely my opinions, is produced for informational purposes only, and is not a recommendation to buy or sell any securities. Investing comes with risk to loss of principal. Please always conduct your own research and consider your investment decisions very carefully.
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This article was written by
Hi, I'm Victor! It all goes back to looking at stock quotes in the old Wall St. Journal when I was a kid. What do these numbers mean, I thought? Fortunately, my uncle was a successful commodities trader on the NYMEX, and I got him to teach me how to invest. I bought my first actual stock in a company when I was 20, and the rest, as they say, is history. Over the years, some of my top investments include Apple, Tesla, Amazon, Netflix, Facebook, Google, Microsoft, Nike, JPMorgan, Bitcoin, and others.
Disclosure: I am/we are long BITCOIN. 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.