First of all, we’re not cryptology experts. We couldn’t tell you what fundamental reason exists for the dramatic move in cryptocurrency prices over the past year, if one even exists. We are experienced financial market observers and lived through the last two bubbles in dot-com and real estate. Maybe we’re still scarred from those, but it sure seems like crypto is in a bubble. However, being in a bubble and being a potentially foundational technology are not mutually exclusive. When the dot-com bubble popped, it didn’t mean that the Internet was over. Few would argue that in the 17 years since the 2000 collapse, the Internet has transformed how humans work and live and has proven to be as impactful a technology as investors thought it might be in 2000, just a few years too early.
We think we’re in a near term bubble. Cryptocurrencies are a polarizing topic, and those that suggest that Bitcoin is in a bubble are often portrayed as not understanding the underlying technology or simply non-believers. We think cryptocurrencies, whether Bitcoin or something else, have a future in how consumers store wealth and transact, but since January 1st, the price of Bitcoin is up 1425+% to $15,250 (as of 12/10 at 10AM ET). Bitcoin has more than tripled in just the last few months. It’s more likely than not that Bitcoin is in a bubble and the price of Bitcoin will be extremely volatile, especially as more futures exchanges open.
Fundamentals don’t seem to support move. Using Bitcoin is still not easy. Setting up digital wallets, using an exchange, and understanding the mechanics of how to conduct Bitcoin transactions is something than many people would find challenging. Transaction volume via Bitcoin has been increasing steadily, up 60% y/y as of year December, but few retail locations accept Bitcoin. This move in transaction volume is far below the 1425%+ the currency value has increased. Bitcoin investors are betting on the price of Bitcoin rising, not on the practicality of the currency. Cryptocurrencies were formerly used as payment on the Silk Road. If Bitcoin intends to be a viable store of value, it needs to have a viable community willing to trade that value because “value” is only valuable to the degree it’s valuable to another person.
Upcoming headwind. Bitcoin futures trading opened up yesterday on the CBOE, and will open on the CME on December 18th. We think this could have a material negative impact on the price of Bitcoin for two reasons:
- Investors will have an easier time betting against Bitcoin.
- Investors could move towards trading futures contracts and out of Bitcoin itself. Futures contracts settle in USD, and provide investors with better liquidity than Bitcoin. For institutional investors, betting on Bitcoin without having to conduct Bitcoin transactions is likely to prove easier.
Other challenges for cryptocurrencies.
Exchanges have had problems processing transactions. The easiest way to purchase Bitcoin is through an exchange. Coinbase operates one of the most popular exchanges in the U.S. From Wednesday through Saturday of Thanksgiving weekend, Coinbase signed up 300,000 new users. Coinbase has had problems with traffic during important periods. During Thursday’s $2,500 drop in Bitcoin, sell orders were temporarily suspended. It’s also worth noting that Coinbase’s CEO warned customers about investing responsibly in an email and blog post on Saturday, which included problems they’ve faced processing orders during times of high volatility.
There is uncertainty about the future regulation of Bitcoin. When China banned ICOs in September, there was a significant drop in the price of Bitcoin. In November, Coinbase was forced to turn over 14,000 customer records to the IRS. With the latest explosion in price, government around the world can no longer ignore Bitcoin. How they decide to deal with cryptocurrencies will have a significant impact on the future. An environmental researcher also noted that Bitcoin mining might consume as much energy as the country of Denmark by 2020, giving a greater incentive for governments to take a longer look at Bitcoin.
As the old adage goes: “When your barber gets in, it’s time to get out.” Well, it’s 2017 and our Uber drivers may be just as good of a measure. Two weeks ago, we had an Uber driver ask us how to buy Bitcoin. We showed her how to sign up on Coinbase and she made the purchase before the end of our trip. A cautionary one-off story that illustrates the Bitcoin investor shift over the past year from tech-futurist, to professional investor, and now the general public.
Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.