The Bitcoin Bubble is Next!

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For those who missed out on the housing bubble and the high tech bubble of the last decade, the Bitcoin bubble is forming. Now valued at over $200 a unit as opposed to around $30 in February, a Bitcoin is a medium of exchange created on the Internet to compensate those for the electricity used in solving complex math problems. It has now ascended to a level to where it is reported to be used for money laundering and other financial activities associated with mature, convertible currencies.

Created in early 2009 by the Internet legend of Satash Nakomoto, Bitcoins in circulation have a value of over $2 billion currently. Purportedly, only 21 million Bitcoins will be issued by 2140.  But as no one knows who or what group compromises Satash Nakomoto, nothing is certain about the future of the Bitcoin.

That greatly resembles the long term economic value of houses purchased with sub-prime mortgages and high tech companies that went public with no earnings: nothing was certain about the future. We all know how that turned out in The Great Recession!

The same fate can be expected for the Bitcoin, too.

For the Bitcoin, it is best to apply Grisham’s Law, which commonly states in its most succinct form that, “Bad money drives out good.”  The Bitcoin is “bad money” for the simple reason it has no economic backing. For a currency to become “good money” and widely utilized as a medium of exchange it must represent the production of an economy and have the support of a central financial authority that allows for other public and private investors to freely trade it so its fair market value can be established in a fully transparent financial exchange.

That is clearly not the Bitcoin.

In recent market action, the Bitcoin has soared more than 600%, from around $30 in February to over $200 now, due to the banking tax in Cyprus and a myriad of favorable publicity. In Google Trends for April, The Japanese Yenis ranked #63 with the Bitcoin at the same. This surge in value and publicity can be attributed to the Bitcoin becoming the province of money launders, tax evaders, and currency manipulators.

No currency can expect to endure as a medium of exchange when the market for it is being made by short term speculators. While there is something to be said for ample liquidity being provided, no asset class, whether it is a currency unit or housing or technology stocks, wants to be controlled by traders, rather than long term investors.

At present, there are reported to be 11 million Bitcoins in circulation. There have been numerous hacking attacks, all of which drove down the price of Bitcoins: these will surely increase as it rises in value.  As there is no central bank to protect the stability of the Bitcoin or guarantee its account, the security of the currency is dubious.

Due to the lack of a governing body, which Bitcoin supporters claim is a huge advantage, everything about it is questionable.  The goal of any financial endeavor should be to access as many markets as possible, which requires sanctioning by central authorities, not ascension by crowd funding.  Due to this lack of a regulatory regime, which no one seeks to operate without in finance, it is uncertain how many Bitcoins are actually in circulation nor what it is worth.

That can only be determined through the cloaked buying or selling of the Bitcoin, which yields profits to the market makers due to the wide spreads, but results in uncertainty for the marketplace and long term value of the asset as it becomes almost a board game.  As with any form of gambling, it is always the house who profits in the end. That will be the same for the Bitcoin as those booking the commissions now and selling after a 600% run-up in just three months will be the winners after the bubble bursts.

The Bitcoin Bubble is Next!

Anna Timone (195 Posts)

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